About the Author:
Aparna Dwivedi is a law student in MMM’s Shankarrao Chavan LAw College, Deccan, Pune
From the case of Salmon vs. Salmon, the idea of establishing a separate legal entity was established. The main fact on which this case was based was that it was disclosed that the company was incorporated by Aron Salomon, even though additional members of his family were also shareholders in that company1. The issue arises when the company’s business went downhill. Hence, eventually both the value of the assets of the company; Mr Salomon’s pay and the pay of other creditors of the company was insufficient2. This case became an exemplary instance for future laws for companies (Jain, 2020).
Facts about the case
Aron Solomon led a very affluent business based on dealing with leather. However, in the year 1892, he converted his business into a limited company and hence, Salomon & Co. Ltd was founded. This was done by Mr Salomon taking out 20,001 out of the 20,007 of the company’s share. The transfer of the business had taken place on June 1 of 1892. Mr Salomon also received £ 10,000 from the company in form of a debenture. On this debenture amount, Edmund Broderip gave an advance of £5000 to Mr Salomon.
However, due to a series of strikes regulated by the government, Mr Salomon’s business and the sales of his leather boots took a collapse. The government was the business’s main customer and they had to split their contract to more firms in order to avoid the risks of few supplies, owing to the strike by the government. Hence, the company had to be put into liquidation. Mr Broderip was repaid his share of the money, which left the company with around £1055. Under this remaining amount, Salomon retained his debentures.
Major issues involved in this case
There were 3 major issues that evolved from this case
• Whether Salomon & Co. Ltd was a company or not in the first place?
• If the company was validly created or was the legislation of the company some sort of artificially made-up contract?
• If Salomon alone would be made accountable for the debts accumulated by the company?
Hence, from the questions, it could be indicated that the major concern was the claim that the unsecured creditors were also swept up in the process of liquidating when only Salomon was the major shareholder of the company3, and hence should be made liable to the debts of the company (Siva, 2010). This issue pointed out the question that whether there would be a different legal identity in a company of a major shareholder who would be accountable for the losses, as opposed to the capital contributions, wherein all the members, that is, other shareholders of the company would be held personally liable for those debts.
Main principles/ laws according to the case
According to the high court: Vaughan Williams J who was the judge had accepted the argument which rules that, since Mr Salomon founded the company and solely transferred the business on his own discretion, hence, Mr Salomon and the company was regarded as one whole unit4. The company could be regarded as his agent and by principle, he had to take responsibility for the unsecured creditors of the company5.
According to the appeal by the court, the court ruled against him on the grounds that he had abused all the rights which were incorporated and bounded his liability to the company. The company’s legislature had only intended to bestow upon an “independent bona fide shareholder.”
Arguments held by the court
Since Salomon & Co. Ltd was incorporated under an act, hence the liquidator challenged that the company never had any independent existence, to begin with. Even though the shares were held by six, the majority shareholder and decisions were taken by Mr Salomon. The business was solely managed by him and the company was only kept as a front for money laundering and fraud.
The House of Lords looked at the statute to come upon a decision, as it was deemed that the statute should be the sole direct towards the case arguments. When the case was presented, the act had provided that seven or more people could be associated for the purpose of the law; this could be done by subscribing the name to the associations’ memorandum. This could also be done by complying with the provisions stipulated in the act, with respect to when the company was registered with or without any limited legal responsibility.
This act also suggested that none of the shareholders can possess lesser than one share. The fact that there were seven shareholders in the case was not argued upon in court, it was a given fact. The company had fulfilled all its requirements according to the act and the court held the company to be a valid and real company, because legally at that point there were no legal loopholes in the formation of the company.
The courts rejected the arguments put forth by the liquidator that Mr Salomon bought all the shares of the company and that his family members were not in any way related to the company. The House of Lords hence held the arguments according to provisions of the act that the person who is subscribing will not be related to one another and that an individual cannot hold sufficient memberships of the shares.
No matter how many shareholders are there, the shares overall are equally shared and the rights and profits are equally divided; this is in no way related to the concern of the sole creditor of the company6. Hence, the House of Lords stipulated that according to the act, nothing was given about the other subscribers of the share being independent or that they should or should not have any substantial interest in the undertakings of the company.
Hence, owing to this case, the “corporate veil” was developed which indicated undertakings between7 a company and its owners.
• The legal provisions for the shareholders and the creditors could be applied here, for the protection of their rights8. A company’s ownership is kept different from that of the shareholders. Hence, in the management of elected representatives or in other
words, the Board of Directors should have been formed, to protect the shareholders from mishaps like this one seen in the case.
• It was a loophole from the side of the House of Lords to indicate what is implied as a separate legal entity and the conditions under which the contracts that are associated with the corporate structures should be enforced9
• The legal aspects of a company cannot be altered, whether the company’s foundation act is legitimate or not. Even though in the case of Salomon, the courts didn’t find any faults with the legalities, even when the company was just a shell and the actual
business was being carried separately from the company. Hence, the courts could have looked at the arguments put forth by the liquidator more carefully.
The rulings in the case of Salomon remain principal even today and formed the foundations of the company laws. Invocation of the veil is triggered by sham, fraud and facade, although there are exceptions to these circumstances. Even though corporate veil is a global notion, the interpretation of the law would depend on the basis of the cases. After the introduction of the corporate veil, it was established that no individual could take cover behind the legal entity to commit any sort of fraud and stay away from any legal liability. However, to apply the concept of the corporate veil, proximity should be applied to this concept of ‘lifting veil.’
In this particular case, it was stipulated that no fraud could have been committed by Mr Aron as legally he was indicated as the creditor of the Salomon Company. Hence, the courts ruled that he had a right to be paid when the company was left with the shares after the debt was recovered before the money was credited to unsecured creditors as it was his debt that was secured against the charges of assets in the company.