SALOMON V. SALOMON & CO., LTD. (1897) AC 22 (HL)
FACTS
- The appellant, Aron Salomon, carried on business, on his own account, as a leather merchant and wholesale boot manufacturer.
- A limited company was formed in 1892 to carry on the business, the subscribers to the memorandum of association (MOA) being the appellant, his wife and daughter, and his four sons.
- 20,007 shares were issued, of which the appellant held 20,001, the other signatories of the memorandum of association holding one share each
- The appellant’s business was sold to the company for £38,782, of which £16,000 was to be paid in cash or debentures, it was resolved to pay the appellant £6,000 in cash and £10,000 in debentures of the company. These debentures certified that the company owed Salomon £ 10,000 and created a charge on the company's assets.
- In October 1893, an order was made for the winding-up of the company, at which date the company was indebted to unsecured creditors other than Aron Salomon (£ 10,000) to the amount of £7,773. Thus, after paying off the debenture holder nothing would be left for the unsecured creditors. An action was brought by the liquidator of the company against the appellant.
- The Trial Court and the Court of Appeal held that the company was entitled to be indemnified by the appellant to the amount of £7,733.
ISSUE
- Whether the respondent company was a company at all-whether, in truth, that artificial creation of the legislature had been validly constituted in this instance?
HELD
The company was held to be a legal entity distinct from its promoters, subscribers or managers fulfilling all the legal requirements to be considered so. The law neither requires that the bulk of shares should not be with a single person nor that all the shareholders be beneficially interested in the corporation. Therefore, these cannot be read into the law, according to which Solomon & Co. was a legal entity independent of Mr. Solomon.
- Lord Halsbury, L.C.: The statute provides for the requirements of the formation of the company which must be the sole guide for determination.
- Since there were seven actual living persons who held shares in the company [Companies Act, 1948 s. 1, which provides for the formation of a company by seven persons], the first condition has been satisfied.
- The statute enacts nothing as to the extent or degree of interest/which may be held by each of the seven, or as to the proportion of interest or influence possessed by one or the majority of the shareholders over the others. One share is enough.
- Once the company is legally incorporated it must be treated like any other independent person with rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.
- The contention that this is against the true intent and meaning of the Companies Act is not to be accepted as there is no limitation in the statute itself that the shareholder must be an independent and beneficially interested person.
- Lord Watson: Counsel for the company argued that the agreement ought to be set aside, upon the principle followed by this House in Erlanger v. New Sombrero Phosphate Co. [(1874- 80) All ER Rep. 271]. In that case the vendor, who got up the company, with the view of selling his adventure to it, attracted shareholders by a prospectus which was essentially false. The directors, who were virtually his nominees, purchased from him without being aware of the real facts; and on their assurance that, in so far as they knew, all was right the shareholders sanctioned the transaction. The fraud by which the company and its shareholders had been misled was directly traceable to the vendor; and the transaction was set aside at the instance of the liquidator. But in the present case the agreement was, in the full knowledge of the facts, approved and adopted by the company itself, if there was a company, and by all the shareholders who ever were or were likely to be members of the company. In my opinion, therefore, Erlanger v. New Sombrero Phosphate Co. has no application, and the original claim of the liquidator is not maintainable.
COMMENTARY
In common law a company is a "legal person" or "legal entity" separate from, and capable of surviving beyond the lives of its members. It was held that Salomon & Co Ltd was a real company fulfilling all the legal requirements. It must be treated as a company, as an entity consisting of certain corporators, but a distinct and independent corporation. Their Lordships of the House of Lords observed: "When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate capable of exercising all the functions of an incorporated company. It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing the bulk of its capital to one person. The company is at law a different person altogether from the subscribers of the memorandum; and though it may be that after incorporating the business is precisely the same as before, the same persons are managers, and the same hands receive the profits, the company is not in law their agent or trustee. The statute enacts nothing as to the extent or degree of interest which may be held by each of the seven, or as to the proportion of interest or influence possessed by one or majority of the shareholders over others. There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any of them should take a substantial interest in the undertaking, or that they should have a mind or will of their own, or that there should be anything like a balance of power in the constitution of the company.