Salomon v Salomon & Co.

is a 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. By 1892, his sons had become
interested in taking part in the business. Salomon decided to incorporate his business as a
Limited company, Salomon & Co. Ltd.
At the time the legal requirement for incorporation was that at least seven persons subscribe as
members of a company i.e. as shareholders. Mr. Salomon himself was managing director. Mr.
Salomon owned 20,001 of the company's 20,007 shares - the remaining six were shared
individually between the other six shareholders (wife, daughter and four sons). Mr. Salomon sold
his business to the new corporation for almost 39,000, of which 10,000 was a debt to him. He
was thus simultaneously the company's principal shareholder and its principal creditor.
He asked the company to issue a debenture of 10,000 to him. However, a sudden slow down in
business occurred and the company could no longer pay interests to Salomon. Even the wife puts
money, but the company still cannot pay. Finally, Salomon transfers the debenture to one B, but
still the company could not pay. B is here a secured creditor, in relation to the company, as he
holds in respect of his a security over property of the company in term of the debenture. B called
for a receiver and therefore, sold the easiest part of the company, i.e., the factory to cover his
debts. That led to the end of the business. This left the debts of the general creditors, for instance,
the general suppliers to be covered. The company had to be hence liquidated and the assets were
to be sold to pay them.

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When the winding up order was made the official receiver became liquidator unless and until an
insolvency practitioner was appointed in his place. As a liquidator of a company, the official
receiver's general functions were to investigate any wrong doing in the company, to secure the
assets, realise them and distribute the proceeds to the company's creditors, and, if there is a
surplus, to the persons entitled to it (normally the contributories). When the company went into
liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the
debt were invalid, on the grounds of fraud; Salomon was not a genuine incorporator.

High Court:

The judge, Vaughan Williams J. accepted this argument, ruling that since Mr. 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:
The Court of Appeal also ruled against Mr. Salomon, on the grounds that Mr. Salomon had
abused the privileges of incorporation and limited liability, which the Legislature had intended
only to confer on "independent bona fide shareholders, who had a mind and will of their own and
were not mere puppets". The lord justices of appeal 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.

The Lords:
The House of Lords unanimously overturned this decision, rejecting the arguments from agency
and fraud.
Salomon followed the required procedures to the set the company; shares and debentures were
issued. The House of Lords held that the company has been validly formed since the Act merely
required 7 members holding at least one share each.
It was irrelevant that the bulk of shares were issued to one shareholder. Statute did not mention
that each share holder should have X amount of shares. It said nothing about their being
independent, or that they should take a substantial interest in the undertaking, or that they should
have a mind and will of their own, or that there should be anything like a balance of power in the
constitution of the company. (In the Companies Act 2001, 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).
There was no fraud as the company was a genuine creature of the Companies Act as there was
compliance and it was in line with the requirements of the Registrar of Companies.
The Company is at law a separate person. The 1862 Act created limited liability companies as
legal persons separate and distinct from the shareholders. They held that there was nothing in the
Act about whether the subscribers (i.e. the shareholders) should be independent of the majority
shareholder. It was held that: "Either the limited company was a legal entity or it was not. If it
were, the business belonged to it and not to Mr Salomon. If it was not, there was no person and
no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a
company and there is not." Hence the business belonged to the company and not to Salomon, and
Salomon was its agent.
The House further noted:

"The company is at law a different person altogether from the [shareholders] ...; 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 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 for by the Act."
b) Lee v. Lee's Air Farming Ltd. (1960) [1961] A.C. 12 (New Zealand P.C.)
The appellant's husband formed the respondent company for the purpose of carrying on the
business of aerial top dressing. The nominal capital of the company was $ 3000 divided into
3000 shares of $ 1 each. Mr Lee held 2999 shares, the final share being held by a solicitor. Mr
Lee was the sole governing director for life. He was the vast majority shareholder, he was the
sole governing director for life and he was an employee of the company pursuant at a salary
arranged by him. Article 33 also provided that in respect of such employment the relationship of
master and servant should exist between him and the company.

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The husband was killed while piloting the company's aircraft in the course of aerial top dressing.
His widow, the appellant, claimed compensation under the New Zealand Workmen's
Compensation Act, 1922. On a case stated for its opinion on a question of law, the New Zealand
Court of Appeal held that since the deceased was the governing director in whom was vested the
full government and control of the company, he could not also be a servant of the company. The
widow appealed.
It was held:
The substantial question which arises is, as their Lordships think, whether the deceased was a
"worker" within the meaning of the Workers' Compensation Act, 1922, and its amendments. Was
he a person who had entered into or worked under a contract of service with an employer?
The company and Mr. Lee were distinct legal entities and therefore capable of entering into legal
relations with one another. As such they had entered into a contractual relationship for him to be
employed as the chief pilot of the company. They found that 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 circumstance that in his capacity as
a shareholder he could control the course of events would not in itself affect the validity of his
contractual relationship with the company. Just as the company and the deceased were separate

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 give an order to the decease. In
their Lordships' view it is a logical consequence of the decision in Salomon's case that one
person may function in dual capacities. The appeal was allowed and the widow was therefore
entitled to compensation.

c) Macaura v. Northern Assurance Co Ltd [1925] AC 619

The property of a company belongs to it and not to its members. Neither a shareholder nor a
creditor of a company (unless a secured creditor) has an insurable interest in the assets of the
company. Mr Macaura was the owner of the Killymoon estate in county Tyrone. In December
1919 he agreed to sell to the Irish Canadian Saw Mills Ltd, 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. He 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. The timber which represented almost the entire
assets of the company, was then stored on the estate. On 6 February 1922 a policy insuring the
timber was taken out in the name of Mr Macaura. On 22 February a fire destroyed the timber on
the estate. Mr Macaura then sought to claim under the policy he had taken out. The Insurance
company contended that he had no insurable interest in the timber as the timber belonged to the
company and not to Mr Macaura. The House of Lords agreeing with the Insurance company,
found that the timber belonged to the company and that Mr Macaura even though he owned all
the shares in the company had no insurable interest in the property of the company. Lord
Wrenbury stated that a member even if he holds all the shares is not the corporation and
neither he nor any creditor of the company has any property legal or equitable in the assets of the
corporation.
4. Exceptions to the separate legal entity principle: Lifting the corporate veil
In a number of instances, the courts want to lift the veil to find out who causes the company to
act. This is usually done for reasons of fraud. There are 2 types of lifting of the veil:
Judicial lifting (most important)
Statutory lifting

(i) Judicial Lifting

(a) Gilford motor company Ltd v. Horne [1933] Ch.935
Mr. Horne was an ex-employee of The Gilford motor company and his employment contract
provided that he could not solicit the customers of the company after the termination of his
employment (negative clause). In order to defeat this, he incorporated a limited company in his
wife's name and solicited the customers of the company. The company brought an action against
him. Horne argued that it was the company (as a separate legal personality) that was attracting

the clients - not him. The Court of appeal was of the view that "the company was formed as a
device, a stratagem, in order to mask the effective carrying on of business of Mr. Horne" in this
case it was clear that the main purpose of incorporating the new company was to perpetrate
fraud. Thus the court of appeal regarded it as a mere sham to cloak his wrongdoings.
Avoidance of an existing legal duty F
While it is generally permissible to form companies to avoid a future liability, for example in a
risky business venture that may fail, courts may not allow a company to be formed to avoid
performing an existing legal duty.

(b) Jones v. Lipman [1962] 1 WLR 832

Mr Lipman had entered into a contract with Mr Jones for the sale of land. Before the
conveyance (the act of transferring the legal title in a property from one person to another), Mr.
Lipman then changed his mind and did not want to complete the sale. He formed a company and
in an attempt to avoid the transaction, sold the land to the company, in which he and his
sollicitors clerk were shareholders and directors. Lipman then claimed that he could not
complete the transaction with Mr Jones since he no longer owned the land, i.e. the company was
now the lawful owner. The judge specifically referred to the judgments in Gilford v. Horne and
held that the company here was "a mask which (Mr. Lipman) holds before his face in an attempt
to avoid recognition by the eye of equity" he awarded specific performance both against Mr.
Lipman and the company.
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Salomon v A Salomon & Co Ltd

From Wikipedia, the free encyclopedia

Salomon v A Salomon & Co Ltd

Court

Whitechapel High Street

House of Lords

Decided
Citation(s)

16 November 1896
[1896] UKHL 1, [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 [1896] UKHL 1 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.

Contents

1 Facts

2 Issues

3 Judgment
o 3.1 High Court
o 3.2 Court of Appeal
o 3.3 House of Lords

4 Significance

5 See also

6 Notes

7 References

Facts
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
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
High Court
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
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]

Lindley LJ was the leading expert on partnerships and company law.

The incorporation of the company cannot be disputed (see s. 18 of the Companies Act 1862). Whether by any p
be reached under s. 48, to which I have already alluded. As the company must be recognised as a corporation, I
regarded by Vaughan Williams J. as the agent of Aron Salomon. I should rather liken the company to a trustee f
any jury were asked, Whose business was it? they would say Aron Salomon's, and they would be right, if they m
under no such liability as Mr. Aron Salomon has come under. His liability rests on the purpose for which he form
with the company without perceiving the trap which he has laid for them.

It is idle to say that persons dealing with companies are protected by s. 43 of the Companies Act, 1862, which r
and his advisers, who were evidently very shrewd people, were fully alive to this circumstance. If the legislatur
Mr. Aron Salomon's scheme is a device to defraud creditors.

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
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 Halsbury LC, a conservative peer and author of Halsbury's Laws took strict literalist approach to legislativ

I have no right to add to the requirements of the statute, nor to take from the requirements thus enacted. The sol

Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. S
Lindley LJ on the other hand, affirms that there were seven members of the company; but he says it is manifest

It is obvious to inquire where is that intention of the Legislature manifested in the statute. Even if we were at lib
supposed prohibition? It is, of course, easy to say that it was contrary to the intention of the Legislature - a prop

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]

Lord Macnaghten.
When the memorandum is duly signed and registered, though there be only seven shares taken,
the subscribers are a body corporate "capable forthwith," to use the words of the enactment, "of
exercising all the functions of an incorporated company." Those are strong words. The company
attains maturity on its birth. There is no period of minority - no interval of incapacity. I cannot
understand how a body corporate thus made "capable" by statute can lose its individuality by
issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or
not. The company is at law a different person altogether from the subscribers to the
memorandum; 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 receive the profits, the
company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as

members liable, in any shape or form, except to the extent and in the manner provided by the
Act. That is, I think, the declared intention of the enactment. If the view of the learned judge
were sound, it would follow that no common law partnership could register as a company limited
by shares without remaining subject to unlimited liability
Among the principal reasons which induce persons to form private companies, as is stated
very clearly by Mr. Palmer in his treatise on the subject, are the desire to avoid the risk of
bankruptcy, and the increased facility afforded for borrowing money. By means of a private
company, as Mr. Palmer observes, a trade can be carried on with limited liability, and without
exposing the persons interested in it in the event of failure to the harsh provisions of the
bankruptcy 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 take and hold the
company's debentures as any outside creditor. Every creditor is entitled to get and to hold the
best security the law allows him to take.
If, however, the declaration of the Court of Appeal means that Mr. Salomon acted fraudulently or
dishonestly, I must say I can find nothing in the evidence to support such an imputation. The
purpose for which Mr. Salomon and the other subscribers to the memorandum were associated
was "lawful." The fact that Mr. Salomon raised 5,000 for the company on debentures that
belonged to him seems to me strong evidence of his good faith and of his confidence in the
company. The unsecured creditors of A. Salomon and Company, Limited, may be entitled to
sympathy, but they have only themselves to blame for their misfortunes. They trusted the
company, I suppose, because they had long dealt with Mr. Salomon, and he had always paid his
way; but they had full notice that they were no longer dealing with an individual, and they must
be taken to have been cognisant of the memorandum and of the articles of association. For such a
catastrophe as has occurred in this case some would blame the law that allows the creation of a
floating charge. But a floating charge is too convenient a form of security to be lightly abolished.
I have long thought, and I believe some of your Lordships also think, that the ordinary trade
creditors of a trading company ought to have a preferential claim on the assets in liquidation in
respect of debts incurred within a certain limited time before the winding-up. But that is not the
law at present. Everybody knows that when there is a winding-up debenture-holders generally
step in and sweep off everything; and a great scandal it is.[7]
It has become the fashion to call companies of this class "one man companies." That is a taking
nickname, but it does not help one much in the way of argument. If it is intended to convey the
meaning that a company which is under the absolute control of one person is not a company
legally incorporated, although the requirements of the Act of 1862 may have been complied with,
it is inaccurate and misleading: if it merely means that there is a predominant partner possessing
an overwhelming influence and entitled practically to the whole of the profits, there is nothing in
that that I can see contrary to the true intention of the Act of 1862, or against public policy, or
detrimental to the interests of creditors. If the shares are fully paid up, it cannot matter whether
they are in the hands of one or many. If the shares are not fully paid, it is as easy to gauge the
solvency of an individual as to estimate the financial ability of a crowd. One argument was
addressed to your Lordships which ought perhaps to be noticed, although it was not the ground
of decision in either of the Courts below. It was argued that the agreement for the transfer of the
business to the company ought to be set aside, because there was no independent board of

directors, and the property was transferred at an overvalue. There are, it seems to me, two
answers to that argument. In the first place, the directors did just what they were authorized to do
by the memorandum of association. There was no fraud or misrepresentation, and there was
nobody deceived. In the second place, the company have put it out of their power to restore tdshe
property which was transferred to them. It was said that the assets were sold by an order made in
the presence of Mr. Salomon, though not with his consent, which declared that the sale was to be
without prejudice to the rights claimed by the company by their counter-claim. I cannot see what
difference that makes. The reservation in the order seems to me to be simply nugatory.