Salomon v. Salomon & Co.
Human Beings are generally legal person but humanity is a state of nature and legal personality is an artificial construct, which may or may not be conferred. The origin of corporation lies in a logical extension of this separation of humanity from legal personality as the group of humans who are engaged in a common activity could attempt to simplify their joint activity by gaining legal personality from the venture. Introduction:
Solomon was leather Merchant who converted his business into a Limited Company as Solomon & Co. limited i.e. Company. The company so formed consisted on Solomon, his wife and five of his children as members. The company purchased the business of Solomon for £39,000; the purchase consideration was paid in terms of £10,000 debentures conferring a charge over the company’s assets, £20,000 in fully paid, £1 share each and the balance in cash.
The company in less than one year ran into difficulties and liquidation proceeding commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Solomon himself). And nothing was left for unsecured creditors. The liquidator on behalf of unsecured creditors alleged that the company was a sham and mere alias or agent for Salomon. Judgment:
At first instance, the case entitled Broderip v SalomonVaughan Williams J said Mr Broderip's claim was valid. It was undisputed that the 200 shares were fully paid up. He said the company had a right of indemnity against Mr Salomon. He said the signatories of the memorandum were mere dummies; the company was just Mr Salomon in another form, an alias, his agent. Therefore it was entitled to indemnity from the principal. The liquidator amended the counter claim, and an award was made for indemnity.
Court of Appeal
The British of Appeal considered the matter and Kay LJ stated that “The statue was intended to allow seven or more persons, bona fide associated for the purpose of trade to limit their Liability, under certain conditions and to become a corporation. But shareholders of Salomon & Co Ltd. were not intended to legalize the pretended association for the purpose of enabling an individual to carry on his business within; Limited Liability in the name of joint stock company.”
Thus, the focus of court of appeal was that the six family members never intended to take part in the business and only held the shares to fulfil the technicality required by the companies act.
House of Lords:
Lord McNaughton held that
‘the company is different person altogether from subscribers… and, though it may be that after incorporation the business is precisely the same as it was before and same persons are managers , and same hand receive the profit , the company is not agent for subscriber or trustee for them. Nor are the subscribers as member liable, in any shape or form, except to the extent and manner prescribed by the Act.’
It can be summarized from the above discussion that the House of Lord unanimously held that the company had been validly constituted, since the Companies Act only required only seven (7) members holding at least one (1) share each. It said nothing about their being independent, or that there should be anything like a balance of power in the constitution of the company. Therefore, the business belonged to the company and not to Solomon rather Solomon was its agent. The company was not agent of Solomon.
Principles Laid in Solomon v Solomon
The House of Lords lay down the following basic principles of a company: 1. 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. These...
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