Case Study

on

Salomon vs Salomon & Co. Ltd.

and
Sri Gopal Jalan & Co. vs Calcutta
Stock Exchange Association Ltd.
Course: Agri Business Laws & Ethics
Presented by…
Group-5
Roll no. 41-50
MBA-ABM (Part II)
 Salomon
vs
Salomon & Co. Ltd.

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 Facts about Salomon & Co. Ltd.
• Mr Aron Salomon made leather boots or shoes as a sole proprietor. His sons
wanted to become business partners, so he turned the business into a limited
liability company.
• This company purchased Salomon's business at an excessive price for its value.
His wife and five elder children became subscribers and the two elder sons
became directors.
• Mr Salomon took 20,001 of the company's 20,007 shares which was payment
from A Salomon & Co Limited for his old business (each share was valued at £1).
• Transfer of the business took place on 1 June 1892. The company also issued to
Mr Salomon £10,000 in debentures. On the security of his debentures, Mr
Salomon received an advance of £5,000 from Edmund Broderip.

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 Contd…
• Soon after Mr Salomon incorporated his business there was a decline
in boot sales. The company failed, defaulting on its interest payments
on its debentures (half held by Broderip).
• Broderip sued to enforce his security. The company was put into
liquidation. Broderip was repaid his £5,000. This left £1,055 company
assets remaining, of which Salomon claimed under the retained
debentures he retained.
• If Salomon's claim was successful this would leave nothing for the
unsecured creditors. 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.

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 The Case of Salomon v A Salomon & Co.
Ltd

• Salomon v A Salomon & Co Ltd [1896] is a landmark UK company

law case. The effect of the House of 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 for payment of outstanding
debts.
• Salomon's case still represents the orthodox view of separate legal
personality under English law, although a number of exceptions have
since evolved.

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 The major 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 to the new
company he was promoting by selling his business for an excessive
price.
• He also argued that the whole formation of the company in this way
was intended as a fraud against its potential unsecured creditors in
the future.

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 Judgement
High Court
• The High Court made the decision against Mr. Salomon. The court
concluded that since Salomon was the creditor of the company from
the beginning as sole proprietorship and even if he changed the form
of the company to a limited liability company, it is still his company as
he is the biggest shareholder of his company.
• The court also confirmed that the other shareholders are just for the
sake of making a limited liability company which requires 7 members
as Directors.

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 Contd…

House of Lords
• The argument of agency and fraud was rejected by the Judge.
• The law was clear and consistent to the fact that in order to
form a limited company, one should have at least seven
subscribers. However, the law does not mentions the
minimum percentage of shares a subscriber should hold.
• The Principle of Separate Legal Entity was also emphasized
during the judgement.

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 The Principle of Separate Legal
Entity

• The conclusion was derived from the Principle of Separate Legal Entity
that states that a company is considered as a separate legal entity and
is the only one liable to pay all the dues upon the company.
• The directors of the company are not liable to pay for any debt of the
company using their personal assets.

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 Sri Gopal Jalan & Co.
vs
Calcutta Stock Exchange
Association Ltd.

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 Facts about the case
• The case was presented before the Supreme Court of India and the
judgement was made on 9th May, 1963.
• Sri Gopal Jalan and Company was the ‘Petitioner’ and ‘Appellant’ and
Calcutta Stock Exchange Association Ltd was the ‘Respondent’.
•  The respondent, in this case, issued capital contains 277 of fully paid
ordinary shares of Rs. 1,000 each. 70 shares out of these issued ones,
were forfeited by the respondent according to its Article of
Association and those forfeited shares were re-issued later on.
• However, the respondent didn't file returns under section 75 of the
Companies Act 1956 (Section 39 of Companies Act 2013), for such re-
issue of the forfeited shares.

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 Contd…

• Due to this, the appellant of this case approached the High Court,
under section 614 of the Companies Act 1956, with the prayer for the
court to issue an order, which requires the respondent to do the
same.
• As per the appellant's contentions, the respondent has to file for the
return of the allotment in respect of the shares that have been re-
issued.

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 Key Issues of the Case

• The point of disputes that came before the court, in this case were as
follows: 
• “What meaning is to be assigned to the word ‘allotment’ that comes
under section 75(1) of the Companies Act 1956?”
• “Whether the company is under the obligation of filing any return on
the allotment for the shares that were re-issued after being forfeited
by the respondent?"

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 Judgement
• The Supreme Court of India, dismissed the appeal that has been filed by
the appellant i.e., Sri Gopal Jalan and Company with costs. And held that,
“the respondent is under no obligation to file the return under section 75
of the Companies Act, 1956.”
• The Court further held that “the word ‘allotment’ is utilized most likely
by the method of alert to forestall any contention being raised that a
return must be recorded of the re-issued shares forfeited for non-
payment of the calls.”
• At the same time, Court also dismissed the contention of the appellant
that the doctrine of expression unius est exclusion alterious, (the
doctrine means, that, “when one thing is expressly mentioned
somewhere, then the other things of the same class are excluded.”), is
not applicable in this case.
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 What the law says?
• As per subsection (1) of the Companies Act, 1956, when any company does
the allotment of its share capital, it must within one month of the same file
a return with the registrar, mentioning the number of shares issued and the
amount of such shares in the allotment, occupation, addresses, and names
of allottees and amount whether due or paid, etc.
• As per subsection (5) of the Companies Act, 1956, in case of issue and
allotment of shares as per the provisions to its articles were forfeited for
the non-payment of calls, then this section shall not be applicable.
• On the other hand, if we talk about the re-issue of the forfeited shares, it
cannot be said that the re-issue of those shares that have already been
issued once, can alter the structure of any company, hence requiring the
company to file a return informing the registrar for any change, at the end.

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