Company Law II

Case Analysis

SALOMON V. A SALOMON & CO. LTD. [1896] UKHL 1

Submitted by

Varun Madan

Semester VI, BBA LLB, Division A, PRN 17010224084

of

Symbiosis Law School, NOIDA

Symbiosis International (Deemed University)

In February, 2020

Under the guidance of

Dr. Mohit Sharma

Assistant Professor

Sec-62, Block-A, 47 & 48, Noida-201301 (U.P.) – India

 CERTIFICATE

The Case Analysis entitled “Salomon v. A Salomon & Co. Ltd. [1896] UKHL 1” submitted
to the Symbiosis Law School, NOIDA for Company Law II as part of Internal assessment is
based on my original work carried out under the guidance of Dr. Mohit Sharma. The research
work has not been submitted elsewhere for award of any degree.

The material borrowed from other sources and incorporated in the submission has been duly
acknowledged. I understand that I myself could be held responsible and accountable for
plagiarism, if any, detected later.

Signature of the candidate:

Date: 13th March, 2020

 SALOMON V. A SALOMON & CO. LTD. [1896] UKHL 1

I. INTRODUCTION
“Incorporation is a cornerstone of modern company law. The consequences stemming from
incorporation are often highly beneficial for those associated in carrying on
a business. There are three methods by which a business can be incorporated; through Royal
Charter; an Act of Parliament; and by Registration with a public body, which were
recognised in the earlier times, in the United Kingdom.
For this case, the latter of the three methods of incorporation shall be considered- registration.
The main consequence of incorporation is that once all the relevant procedural requirements
have been complied with, the company itself acquires a personality recognised in law
separate from its members. This means that a company will have the capacity to enter into
binding agreements with third parties, through the acts of its agents.
The case in question, follows the procedure, as below.”

II. FACTS
 “Aaron Salomon was a successful leather merchant who specialized in manufacturing
leather boots. For many years he ran his business as a sole trader. 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.
 Salomon’s business eventually failed and it defaulted on its interest payments on the
debentures (half held by Broderip). Broderip sued to enforce his security.
 The company went into liquidation. Broderip was repaid his £5,000. This left £1,055
company assets remaining.  Salomon claimed this amount under his retained debentures.
This would leave nothing for unsecured creditors.
 The company’s liquidator, Mr. Brodrip, stood on behalf of the company’s creditors and
denied Mr. Salomon’s claim. He suggested: 1. The price of the company paid for the
business was excessive and 2. The formation of the company constituted as a ‘fraud to the
creditors.’
 The company’s liquidator argued that Salomon should be responsible for the company’s
debts, on grounds of fraud. Salomon sued for the price of £1,055.”
 III. ISSUE
“The case concerned claims of certain unsecured creditors in the liquidation process of
Salomon Ltd., a company in which Salomon was the majority shareholder, and accordingly,
was sought to be made personally liable for the company’s debt. Hence, the issue was
whether, regardless of the separate legal identity of a company, a shareholder/controller
could be held liable for its debt, over and above the capital contribution, so as to expose
such member to unlimited personal liability.
Therefore, the question that arose was of the legitimacy of the Doctrine of Corporate
Personality, as set out in the Companies Act, 1862.1”

IV. JUDGEMENT & REASONING

“JUDGEMENT OF THE COURT OF INSTANCE
At the Court of First Instance, Brodrip v Salomon2, Vaughan Wiliams J. (Williams) did not
accept Mr. Brodrip’s claims. Alternatively, he found that the company had conducted
business as an agent for Mr. Salomon, making Mr. Salomon himself the principle. Williams
found the members of the company to be unfit for function and the company was just Mr.
Salomon ‘in another form’. Williams held Mr. Salomon to be personally liable to indemnify
the creditors for ‘all the debts incurred in the course of agency for him’. 3 Mr. Salomon
appealed.”
“JUDGMENT OF THE COURT OF APPEAL
In the circumstances of the case, Court of Appeal held that the whole transaction was
contrary to the true intent of the Companies Act and the company was a mere sham,” and an
“alias”, simulacrum, agent, trustee of the nominee Salomon who remained the real proprietor
of the business. As such, Salomon was liable to indemnify the company against its trading
debts.
JUDGMENT OF THE HOUSE OF LORDS
“Famously and quite seminally, the House of Lords by a slim majority of 3/2 disagreed with
the judgment of the Court of Appeal. It found that the fact that some of the shareholders only
held shares as a technicality was irrelevant; the machinery of the Companies Act could be
used by an individual to carry out what is in economic reality for his or her business.

1
§ 6 - 'Any seven or more persons associated for any lawful purpose may, by subscribing their names to a
memorandum of association, and otherwise complying with the requisitions of this Act in respect of registration,
form an incorporated company, with or without limited liability.'
§ 8 - 'Where a company is formed on the principle of having the liability of its members limited to the amount
unpaid on their shares, hereinafter referred to as a company limited by shares, the Memorandum of Association
shall contain the following things' the third of which was 'objects for which the proposed company is to be
established.'
2
[1893] B 4793.
3
Broderip v. Salomon, (1895) 2 ch 323.
 It also emphasized that a company formed in compliance with the regulation of the
Companies Act is a separate person and not per se the agent of its controller. The decision
also affirmed that the use of debentures instead of shares can further protect investors.
The House of Lords unanimously overturned this decision, rejecting the arguments from
agency and fraud.
Salomon followed the required procedures to 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.
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.”
In the words of Lord MacNagthen –
“The company is at law a different person altogether from the subscribers. …, 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 at
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”
“The legal fiction of corporate veil, thus established, enunciates that a company has a legal
personality separate and independent from the identity of its shareholders 4. Hence, any rights,
obligations or liabilities of a company are discrete from those of its shareholders, where the
latter are responsible only to the extent of their capital contributions,” known as “limited
liability”. “This corporate fiction was devised to enable groups of individuals to pursue an
economic purpose as a single unit, without exposure to risks or liabilities in one’s personal
capacity. Accordingly, a company can own property, execute contracts, raise debt, make
investments and assume other rights and obligations, independent of its members. Moreover,
as companies can then sue and be sued on its own name, it facilitates legal course
too5. Lastly, the most striking consequence of SLP is that a company survives the death of its
members.6”

V. PRINCIPLES AND RULES LAID DOWN

The House of Lords lay down the following basic principles of a company:
ARTIFICIAL PERSON
The company is a juristic person; however, it does not possess the body of a natural being. It
exists only in contemplation of law. Being an artificial person, it has to depend upon natural
persons, namely, the directors, officers, shareholders, and corporate managers, etc., for its
management and day to day running. However, these individuals only represent the company
and accordingly whatever they do within the scope of the authority conferred upon them and
in the name and on behalf of the company, they bind the company and not themselves.

4
Murray A. Pickering, ‘The Company as a Separate Legal Entity’ (1968) 31 Mod. L. Rev. 481
5
Metropolitan Saloon Omnibus Co. Ltd. v Hawkins, (1859) 4 Hurl & N 87.
6
Re Noel Tedman Holdings Pty Ltd., 1967
LIMITED LIABILITY
One of the principal advantages of trading through the medium of a limited company is that
the members of the company are only liable to contribute toward payments of its debts to a
limited extent. If the company is limited by shares, the shareholders liability to contribute is
measured by the nominal value of the shares he or she holds. In other words, once he or she
or someone who held the shares previously has paid that nominal value plus any premium
agreed on when the shares were issued, he is no longer liable to contribute anything further.
However, the companies may be formed with unlimited liability of members, or members
may guarantee a particular amount. In such cases, liability of the members shall not be
limited to the nominal or face value of their shares and the premium, if any, unpaid thereon.
In the case of unlimited liability companies, members shall continue to be liable till the whole
amount has been paid off.  If a company is unable to pay its debts, its creditors may petition
the court to wind it up.
These principles have been endorsed in many other cases, for instance, in the case of Lee v
Lee’s Air Farming Limited, ‘L’ formed a company with a share capital of three thousand
pounds, of which 2999 pounds were held by ‘L’. He was also the sole governing director. In
his capacity as the controlling shareholder, ‘L’ exercised full and unrestricted control over the
affairs of the company. ‘L’ was qualified pilot also and was appointed as the chief pilot of the
company under the articles and drew a salary for the same. While piloting the company’s
plane he was killed in an accident. As the workers of the company were insured, workers
were entitled for compensation on death or injury. The question was while holding the
position of a sole governing director could ‘L’ also be an employee/worker of the company. It
was held that the mere fact, someone was the director of the company was no impediment to
his entering into a contract to serve the company. If the company was a legal entity, there was
no reason to change the validity of any contractual obligations which were created between
the company and the deceased. The contract could not be avoided merely because ‘L’ was the
agent of the company in its negotiations. Accordingly, ‘L’ was an employee of the company,
and, therefore, entitled to compensation claim.
LIFTING THE VEIL OF INCORPORATION
In view of above discussion, the chief advantage of incorporation from which all others
follow is, of course, the separate legal entity. In reality, however, the business of the artificial
person is always carried on by, and for the benefit of, some individuals. In the ultimate
analysis, some human beings are the real beneficiaries of the corporate advantages, ‘for a
while, by fiction of law, a corporation is a distinct entity, yet in reality, it is an association of
persons who are in fact the beneficiaries of corporate property’ – Gallagher v. Germania
Brewing Company.
It may, therefore, happen that the corporate personality of the company is used to commit
frauds or improper illegal acts. Since an artificial person is not capable of doing anything
illegal or fraudulent, the facade of corporate personality might have to be removed to identify
the persons who are really guilty. This is known as lifting the corporate veil. Although, in
general, the courts do not interfere and essentially go by the principle of separate entity as
laid down in the Solomon’s case as discussed above.
However, with the passage of time, the courts come to realize that there can be fraudulent and
mischievous schemes drawn by the promoters and members of the companies and the
principle of Solomon’s case cannot be extended to each and every company. It may be in the
interest of members in general, or in public interest to identify and punish the persons who
misuse the medium of corporate personality.

VI. CRITICISM AGAINST SALOMON’S CASE

Corporate theory has certain principles which practitioners and academics have struggled to
define. Some of these principles seem somehow unsuitable for strict and permanent
delineations given that their construction often changes with time. The case of Salomon v.
Salomon and Co. Ltd  which has formed the basis of company law globally is one such
example. However, as every coin has two sides. Similarly, there’s a different angle to this
popular case.
The criticisms of Salomon’s case are of two-fold:
1. The decision gives even apparently honest incorporators the benefit of limited liability
in situations where it is not necessary in order to encourage them to initiate or carry
on their trade or business.
2. The opportunities that the decision affords to corrupt promoters of private companies
to abuse the advantages that the Corporations Act gives them by achieving a “wafer-
thin” incorporation of an undercapitalized company.
When the House of Lords approved the decision in Salomon’s case, each company is seen as
a separate legal entity. Added to the consequent attribute of limited liability, Salomon’s
principle becomes an active format for fraud. As it can provide protective facilities for the
directors and members of the company against claimants such as creditors, it has presented
the grounds for fraudulence and other anti-social activities.
Criticism is also mounted against Salomon’s case on the basis that priority is given to the
separate identity principle over the economic reality of a one-person company. In the
article, The Law Quarterly Review, Goulding explains that criticism laid against Salomon’s
case is two-fold. First, the unanimous ruling made by the House of Lords in this case gives
incorporators the benefit of limited liability even in situations where it may be deemed
unnecessary. Second, this decision affords unscrupulous promoters’ opportunities to abuse
the privileges provided for under the Corporations Act.

VII. CONCLUSION
In Lee v Lee’s Air Farming Ltd7 Lee held all but one of the shares in the company and was
appointed the governing director and chief pilot of the company on a salary. Lee was killed in
an air crash while working for the company. His widow claimed compensation, it was argued
that no compensation was payable because Lee and Lee’s Air Farming Ltd. were the same
person. The Privy Council in applying Salomon’s case held that Lee was a separate person

7
[1963] 3 All ELR 420
from the company he formed and compensation was payable. Thus, the separate personality
of a company was established and given judicial recognition.
There is no doubt that the decision in Salomon’s case established the separate legal
personality of a company, allowing shareholders to carry on trading with minimal exposure to
the risk of personal insolvency in the event of a collapse. There are, however, exceptions to
this principle wherein the court may justifiably disregard and make rulings contrary to this
principle.
It remains, however, a daunting task for academics and practitioners to find a basis in which
the courts may be justified to lift the corporate veil. This is largely due to the fact that this is
an area where case facts and personal views of judges have a bearing on the outcome.
Nonetheless, the principle in Salomon case is widely recognized and followed in courts. This
principle has since been followed in all major company proceedings in court. Salomon’s case
has become a landmark company case law in the UK and is often cited in most cases within
the area of company law.
All in all, the Salomon ruling remains predominant and continues to underpin English
company law. While sham, façade and fraud primarily trigger the invocation of the veil
piercing exception in limited circumstances, these grounds are not exhaustive, and much is
left to the discretion and interpretation of the courts on case-to-case basis.

BIBLIOGRAPHY
 Brodrip v Salomon, [1893] B 4793
 Murray A. Pickering, ‘The Company as a Separate Legal Entity’ (1968) 31 Mod. L. Rev.
481
 Metropolitan Saloon Omnibus Co. Ltd. v Hawkins, (1859) 4 Hurl & N 87.
 Re Noel Tedman Holdings Pty Ltd., 1967
 Salomon v A Salomon & Co Ltd, [1896] UKHL 1
 Lee v Lee’s Air Farming Ltd, [1963] 3 All ELR 420