The Landmark Case Of Salomon v Salomon & Co. Ltd, 1897-Jus Dicere

Salomon v Salomon is the leading case which laid down the principle of the Corporate veil. It is a landmark judgment in UK Company Law case which firmly upheld the Doctrine of Corporate personality as a separate legal entity and thus the shareholders can’t be personally liable for the insolvency of the company.

Facts of the case: The appellant Aron Salomon was a wholesale supplier of the export quality leather boot, around 30 years back of 1892. On 1st June 1892, he transferred his business to a company where the appellant, his wife, daughter and four sons were the subscriber to the memorandum of association. The appellant’s business was sold to Company for the sum of £ 38,782 in which £ 16,000 was decided to be paid in form of cash or debenture. This was an excessive price for the value of the business. Debenture of worth £ 10,000 was issued in favour of Aron Salomon which he later gave to one Mr. Edmund Broderip as a security for a mortgage for £ 5,000. The appellant took 20,001 of the company’s 20,007 shares as a payment for his old business. Later on, the company’s business failed and in October 1893, an order was made to wind up the business of the company. At this date, a company was indebted to £ 7,773 to the unsecured creditors. The liquidator alleged that the company was merely a sham and brought an action against the appellant to indemnify the debts of the company.

Issue of the case: The liquidator pointed out Aron Salomon guilty for nonfulfilling his fiduciary duty for the company by taking excessive money to sold his business to the company. According to the liquidator contentions, Aron Salomon was the major shareholder, he could not fulfill his responsibilities against the company and unsecured creditors. He sought the appellant personally liable for the debts of the company. Hence the question was whether the shareholder of a company could be imposed with the unlimited liabilities of the company and can be personally charged for it.

Judgement: Court of appeal adjudicated in favour of liquidator contentions over the appellant and found Aron Salomon responsible to indemnify the debts of unsecured creditors of the company. The court considered the company’s business as Salomon’s own business and the signatories of the memorandum of association were dummies and the company was working just as Aron Salomon’s agent. The appellant was the Principal and earned excessive money by this business thus he owed to indemnify the company’s debt. Court of appeal considered the company as a personal liability of Salomon by ignoring company as a separate legal identity.

The House of Lord reverses the judgment of the Court of Appeal. It analyzed the proposition laid down by the Court of Appeal ‘that the Company was working just an agent of Salomon, to carry on his business’. In this discussion, the House of Lords talked thoroughly about the existence of the company. ‘At a time either there can be an existence of company or not. If it is in existence by the act, then it is a legal entity with its own business but not belonging to Salomon and if a Company is not in existence in reality, then it is just a myth or fiction and there is no point to work as an agent by the company’. The judgment of lower court bears a resemblance to the testimony of liquidator that “the price paid by the company to

Salomon to sell his business was excessive in amount but here one thing is worth noticing that the time when Salomon transferred his business to the company it was in a sound condition and there was a substantial surplus”. After observing all the facts the House of Lords relied on the fact “that Incorporation of the Company can’t be disputed.”

Thus it is the Landmark judgment which laid down the concepts about the formation and working of the company and about the Corporate Veil. This theory of Corporate entity provided the basic principle on which the whole law of Incorporation is based.

In the judgment of Salomon v Salomon, the separate legal identity of a company and its responsibilities and duties were discussed in detail which was further affirmed in case of Lee v Lee’s Air Farming Ltd., 1925. Lee was a pilot who incorporated an Air Farming Company where he worked as Managing director and in the capacity of his post, he appointed himself as a pilot of the company. He lost his life while working as a pilot for the company and his widow sought compensation under Workmen’s compensation Act. The court upheld her appeal and declared that “In effect, the magic of corporate personality enabled him to be master and servant at the same time” which authorized his widow for getting compensation for her husband who died while serving the company as a pilot.

The principle of Separate Legal Entity of a company was affirmed in many instances by courts. In case of Macaura v Northern Assurance Co. Ltd., 1925; Court declared that “members have no interest in the company property”. Here the owner of a timber state was a creditor of a company which was majorly owned by him. He took insurance for the assets in his name against any fire accident. Soon after, the fire broke out and he filed the insurance for the damage. But the court decided in favour of an insurance company, as “a member of a company can’t own the assets of the company on his own name”.

Though the principle of Independent Corporate Existence gained its widespread acceptance after Salomon case the similar has been recognized by Calcutta High Court in Kondoli Tea Co. Ltd. case in 1886; before the Salomon judgment. In this case, few people transferred a tea estate to a company and tried for exemption from ad valorem duty as they were themselves the shareholders of the company and it was merely the transfer among themselves under another name. Here Court observed that “The Company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of property as if the shareholder had been a totally different person.” In reality, most of the provisions of Indian law have great similarity with English law. The judgment in the Salomon case was also incorporated well in Indian Incorporation act. Bombay High Court referred Salomon judgement in TR Pratt (Bombay) Ltd. v ED Sassoon & Co. Ltd. case in 1935 where court stressed that “Under the law, an incorporated company is a distinct entity, and although all the shares may be practically controlled by one person, in law company is a distinct entity and it is not permissible or relevant to inquire whether the directors belonged to the same family or whether it is, as compendiously described, a one-man company.”

Likewise Supreme Court in The Supreme Court in Tata Engineering Locomotive Co. Ltd. v State of Bihar & Others case in 1964; affirmed that “the position of a corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders. It bears its own names and has a seal of its own. Its assets are separate and distinct from those of its members. It can sue and be sued exclusively for its own purpose. The liability of the members of the shareholders is limited to the capital invested by them. The creditors of the members have no right to the assets of the corporation.”

Significance: Although the decision in Salomon case had some negative impacts over time. Because it instituted the base for the growth of modern capitalist society under the protection of corporate veil but it is also true that this has been neutralized time to time by the joint effort of legislative and judiciary. Thus the precedents helped in setting up the fundamental standards for creating and proper functioning of an Incorporation. Thus corporate veil works as a protective device for those who work for a company, in good faith. In fact, identification as a separate legal entity of an Incorporation makes it liable for the acts, done by its workmen and this veil protects the person not to be personally liable for the act done by him, on behalf of the company under the capacity of his post in the company. But it is not just and fair to make Company accountable all the time, for the wrongdoer fraudulent or irresponsible acts, as Company can’t have any Mens rea to commit any fault as it is an artificial legal person. Thus in a certain situation, this veil needs to be lifted, to uphold the law, for the interest of equity, a good conscience, and justice, without any prejudice. This concept is known as ‘Lifting of Corporate Veil’ which is widely practiced by the courts in their judgment with the help of different statutory provisions of Law. By this way, Courts have a flexible tool of Law, to ensure justice by penetrating the wall of Incorporation to probe the faulty person.

By Jus Dicere Team

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