SYMBIOSIS LAW SCHOOL, PUNE
DIPLOMA IN INTERNATIONAL BUSINESS LAWS AND
CORPORATE LAWS IN INDIA (DIBL)
ASSIGNMENT III
CASE STUDY
SALOMON V. A SALOMON & CO LTD
NAME- ROCHAK SINGLA
PRN-206000026
LLB- 2ND YEAR
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CONTENTS
INTRODUCTION ................................................................................................................ 3
FACTS OF THE CASE ........................................................................................................ 3
ISSUES INVOLVED ............................................................................................................ 3
JUDGEMENT OF THE LOWER COURT ........................................................................... 4
ARGUMENTS BY THE APPELLANT ................................................................................ 4
ARGUMENTS BY THE DEFENDANT ............................................................................... 4
LEGAL ANALYSIS ............................................................................................................. 5
JUDGEMENTS REFERRED................................................................................................ 5
JUDGEMENT ...................................................................................................................... 6
CURRENT STATUS ............................................................................................................ 6
CONCLUSION ..................................................................................................................... 7
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INTRODUCTION
The basic premise 0f the C0mpany's law is that the C0mpany registered under this deed is a
legal entity that is implanted, separate and distinct fr0m the members by which it is c0nstituted.
The 0rdinance was unanim0usly appr0ved by the H0use 0f L0rds in this case. Theref0re, it has
been f0und that the c0mpany has a different legal pers0nality. H0wever, this p0licy emp0wers
c0rp0rate gr0ups t0 av0id their debt.
FACTS OF THE CASE
Ar0n Sal0m0n, the c0mplainant, ran a b00t manufacturing business as a single trader. F0r the
s0le purp0se 0f transferring his business t0 a j0int venture c0mpany, (which must have his
family as shareh0lders). There was an initial agreement that settled the c 0nditi0n that a certain
p0rti0n 0f the payment w0uld be made in the f0rm 0f 0btaining c0mpany rights. A
Mem0randum 0f Understanding (M0U) was made 0n July 28, 1892, between the Appellant,
his wife and his five children as s0le shareh0lders, and the c0mplainant has 20,001 shares under
his name. After the 0perati0n 0f the M0U, 'Ar0n Sal0m0n and C0mpany, Limited' was
established. Edmund Br0derip, 0ne 0f the safest lenders, has been given new debt t0 secure a
return 0n 8% interest. The default is d0ne in the interest secti0n, Mr. Br0derip c0mmits an
acti0n t0 cl0se the c0mpany. A financier was app0inted in the event 0f a liquidati0n 0rder in
which case the c0mpany's unsecured lenders are inv0lved. After the payment was made t0 Mr.
Br0derip, S0l0m0n said he had a right t0 repay it, bef0re giving m0ney t0 th0se unsafe lenders.
T0 prevent such an inn0cent ban, the seller, representing the interests 0f unsecured credit0rs,
said the c0mpany was fraudulent and S0l0m0n was the c0mpany's att0rney and theref0re, he
was resp0nsible f0r his debt.
ISSUES INVOLVED
1. Whether the Salomon & Co. Ltd. was a company at all?
2. Whether in truth the artificial creation of the legislation, i.e., the company, had been validly created
in the instant case?
3. Whether Salomon was liable for the debts of the company?
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JUDGEMENT OF THE LOWER COURT
The C0urt 0f Appeal (Lindley, L0pes and Kay L.JJ.) agreed with the Supreme C0urt's 0pini0n
(Vaughan Williams J.) and ruled that Mr. Br0derip was active because the applicant had abused
the (c0mpany's) inclusi0n rights. The C0urt further added that the shareh0lders were merely
c0rp0rate celebrities and that the 0nly thing acting 0n behalf 0f the c0mpany was Mr. Sal0m0n.
Theref0re, Mr. Sal0m0n (principal) had t0 pay the c0mpany.
ARGUMENTS BY THE APPELLANT
Appellants argue that lenders are free t0 acquire their share 0f the shares and the 0wner 0f th0se
rates. Under secti0ns 6,8,30,43 0r any 0ther secti0n 0f the C0mpanies Act, 1862 there was n0
0bjecti0n t0 a c0mpany designed f0r such purp0ses. Since a c0mpany fulfills all the legal
requirements f0r its treatment as a real c0mpany, it sh0uld be treated as a separate legal entity,
with specific entities but as a separate independent entity. The l0wer c0urts have made
c0nundrums by treating Sal0m0n and C0 as big 0r unrealistic. C0urts must ch00se 0ne fr0m
b0th. Because there is n0 enf0rcement 0f the shareh0lders' pers0nal 0bligati0n in respect 0f the
c0mpany's debt, the c0urts cann0t challenge the legislature and place such a burden 0n them.
ARGUMENTS BY THE DEFENDANT
The main arguments 0f the defendants were based 0n facts but n0t 0n the same culture. The
transfer0r has placed the c0mpany 0utside the independent b0ard 0f direct0rs; he was the head
0f the c0mpany and 0wned the c0mpany acc0rding t0 his 0wn wishes and aspirati0ns. The
appellant t00k the debentures and hid the truth fr0m the lenders t0 get the wr0ng interest 0n
them. Alth0ugh the c0mpany was 0fficially registered, it has never been independent; 0ther
direct0rs (his s0ns and his wife) and the c0mpany were always under the 0pp0siti0n. Due t0
the p0pularity 0f the shares, the c0mplainant became the s0le 0wner 0f the c0mpany, enabling
him t0 make any decisi0n.
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LEGAL ANALYSIS
The H0use 0f L0rds unanim0usly 0verturned the C0urt 0f Appeals' decisi0n and dismissed the
fraud charges with the agency. T0 determine if there is fraud, 0ne decisi0n can be made by
determining whether the c0mpany is inv0lved in the acti0n. In the present case, the c0mpany
is built 0n an acti0n basis theref0re, the fraud issue d0es n0t stand. And the c0mpany stands as
a separate legal entity. It was clear that it was unacceptable f0r judges t0 interpret the limitati0ns
0f the law acc0rding t0 their 0wn 0pini0n. The c0mpany has remained the same even th0ugh
it was j0ined by the same pr0fitable hands, this d0es n0t make the c0mpany a trustee 0r agent
0f its subscribers and theref0re, they are n0t resp0nsible f0r its 0wn debt.
The H0use 0f L0rd als0 added that "the intenti0ns 0f th0se inv0lved in the pr0m0ti0n 0f the
c0mpany d0 n0t w0rk at all in neg0tiating rights and th0se rights"1 and the 0fficial myth 0f the
"C0rp0rate Veil" between the c0mpany and its 0wners and direct0rs were firmly established.
The decisi0n als0 highlights the principle 0f “Legal Div0rce” as a “tw0-edged sw0rd”2. In
c0nclusi0n, the H0use 0f L0rds summed up the matter by saying, “There is n0thing in the Law
that requires th0se wh0 have registered f0r a mem0randum t0 be independent 0r affiliated, 0r
that any 0f them sh0uld have a deep interest in the w0rk, 0r that they sh0uld have their 0wn
mind and will, 0r that there sh0uld be anything like a balance 0f p0wer in the c0mpany
c0nstituti0n.”3
JUDGEMENTS REFERRED
In Erlanger v. New Sombrero Phosphate Co4, held that the pe0ple wh0 build a
c0mpany and sell their pr0perty t0 that c0mpany, h0ld a designated title t0 that
c0mpany and theref0re, sh0uld remain h0nest and discl0se any transacti0n affecting the
c0mpany's capital.
In the case 0f In Re Baglan Hall Colliery Co5, the decisi0n 0f Malins V. was
0verturned stating that a c0untry that has appr0ved such a law, when the debt falls t0
the 0wner, that c0untry is in a very sad state.
1
Gas Lighting Improvement Co. Ltd. v Commissioners of Inland Revenue, 1923 A.C. 723.
2
PUIG G.V.,A Two-Edged Sword: Salomon And The Separate Legal Entity Doctrine, Corporation law
Vol.7(3).(2000).
3
Salomon v Salomon, [1896] UKHL 1 (Lord Macnaghten) (appeal taken from the Court of Appeal) (UK).
4
(1878) 3 App. Cas. 1218, 1236, 1238.
5
L. R. 5 Ch. 346.
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North-West Transportation Co v. Beatty6, it was decided that if a c0mpany entered
int0 an agreement with the 0wner 0f a maj0rity 0f its shares, that c0ntract w0uld still
be valid and binding.
JUDGEMENT
The c0mpany is a separate legal entity separate fr0m its members and theref0re pr0tects Mr.
Sal0m0n, f0under 0f A. Sal0m0n and C0mpany, Ltd., in pers0nal 0bligati0ns t0 the credit0rs
0f the c0mpany he f0unded. The c0urt als0 str0ngly supp0rted c0rp0rate ethics in c0mpanies,
as set 0ut in the C0mpanies Act 1862, s0 that lenders 0f a n0n-pr0fit c0mpany c0uld sue the
c0mpany's shareh0lders t0 pay 0ff arrears.
CURRENT STATUS
Sal0m0n v Sal0m0n's decisi0n has failed in time and is n0w being challenged by vari0us
judgments. Recent lawsuits such as Tokyo v Karoon7 have challenged S0l0m0n's already
established appr0ach.
In additi0n, in the case 0f VTB Capital Plc v Nutritek International Corporation8, the c0urts
have c0nfirmed the limit f0r piercing the c0ver as a limited remedy.
In a recent decisi0n by Perst v Petrodel9, Sumpti0n J. bl0cked the raising 0f the veil in 0nly
tw0 cases, "the p0licy 0f c0ncealment" and "the law 0f escape". Theref0re, the case rem0ved
its f0cus fr0m the c0rp0rate reality c0verage and reinstated S0l0m0n Principle.
6
(1887) 12 App. Cas. 589.
7
1987 A.C. 45, 64.
8
2013 UKSC 5.
9
2013 UKSC 34.
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CONCLUSION
The decisi0n in S0l0m0n is s0metimes c0nsidered t0 be based 0n the idea 0f a different legal
pers0nality. This is an ap0cryphal, c0ncept 0f legal rec0gniti0n by a pers0n established bef0re
1897 by the J0int St0ck C0mpanies Act 1844. S0l0m0n p0inted 0ut that the c0urts had n0t,
until then, fully ackn0wledged the c0nsequences 0f inclusi0n and 'distinctive legal pers0nality.'
'. It is emphasized that the c0urt will n0t questi0n the effectiveness 0f the inserti0n in
registrati0n when all the pr0cedures agreed with it, even if the effect 0f the inserti0n w0uld be
t0 pr0tect the 0wner (s) fr0m liabilities incurred by c0ntinuing business, which is called
'c0ns0lidati0n level10'. In additi0n, there were tw0 0ther dynasties established by the R0yal
H0use 0f S0l0m0n11.
First, S0l0m0n secretly identified a ‘0ne-man c0mpany’ bef0re the legislature appr0ved their
c0nstructi0n in 199212. Sec0nd, an agency 0r trust relati0nship cann0t be claimed 0n the basis
0f a shareh0lder in a c0mpany. All in all, S0l0m0n's decisi0n remains the same and c0ntinues
t0 be the subject 0f an English c0mpany law. While sham, façade and decepti0n have primarily
shaken up the integrati0n 0f n0n-veil c0verage in c0nfined spaces, these reas0ns are
inc0mplete, and much is left t0 the m0nit0ring and analysis 0f vari0us c0urt cases.
10
Atlas Maritime Co SA v Avalon Maritime Ltd
11
Peter B.Oh, ‘Veil-Piercing Unbound’ (2013) 93 B.U. L. Rev. 89.
12
Companies (Single Member Private Limited Companies) Regulations 1992
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