Saloman v. Saloman & Co. Ltd

A sole proprietor transferred his business to a company incorporated by him. Does that protect him from being personally liable for the incorporated company? Yes, as the incorporation gives the company a separate legal entity.
CITATION[1897] AC 22
COURTHouse of Lords
JUDGES/CORAMLord Macnaghten, Lord Halsbury and Lord Herschell
DATE OF JUDGEMENT16.11.1897

Introduction

Separate Legal Personality (SLP) or Separate Legal Entity is the basic concept on which Company Law is based. It is perhaps, the most profound and steady rule of corporate jurisprudence. Interestingly, the rule of SLP has experienced much turbulence historically and is one of the most litigated aspects across jurisdictions. Nonetheless, this principle, established in the landmark case of Salomon v Salomon, is still much prevalent and is conventionally celebrated as forming the core of the universal commercial law regime.

Facts

The facts of the case are as follows: One Aron Salomon transferred his business of boot making, a sole proprietorship, to a company under the name of Salomon Ltd., incorporated with members comprising of himself and his family. The price for such transfer was paid to Salomon by way of shares, and debentures having a floating charge on the assets of the company.

Eventually, when the company’s business failed, Salomon’s right of recovery against the debentures stood aprior to the claims of unsecured creditors, who would, thus, have recovered nothing from the liquidation proceeds. Thus, one Broderip who held half the debentures on the company did not receive his interest on the debentures and hence, Broderip sued Salomon. Subsequently, the company was liquidated by the High Court and Broderip was re-paid his interest. The residual amount after Broderip’s re-payment was not enough to pay back Salomon as well as the unsecured creditors. To avoid such unjust exclusion, the liquidator, on behalf of the unsecured creditors, alleged that the company was sham, was essentially an agent of Salomon, and therefore, Salomon being the principal was personally liable for its debt. In other words, the liquidator sought to overlook the separate personality of Salomon Ltd., distinct from its member Salomon, so as to make Salomon personally liable for the company’s debts. Accordingly, Salomon was sued.

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Issues

The main issue in the case was: Whether or not, regardless of the separate legal identity of a company, a shareholder/controller could be held liable for the company’s debt, over and above the capital contribution, so as to expose such member to unlimited personal liability.

Summary of court decision and judgment

When Broderip sued Salomon (Broderip v. Salomon[1]) the High Court held Broderip’s claim to be valid and he was re-paid his interest on the debentures held by him. Thereafter, in the appeal before the Court of Appeals, the High Court’s decision was upheld by Lord Lindley, Lord Lopes and Lord Kay.

Subsequently, the House of Lords’ unanimous ruling upheld 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 to pay up outstanding debts owed. Thus, the HL overturned the lower courts’ decision.

Analysis

When the Companies Act, 1862 is seen, there is nothing in the Act which makes the shareholders independent of the majority shareholder i.e., the Act treats all shareholders on the same footing. In the present case, the company Salomon & Co. was duly incorporated under the Act. In the words of Lord Halsbury, “the statute enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others”. No shareholder can be made individually responsible for the company’s debts in any circumstances.

Conclusion

Overall, the Salomon ruling remains predominant and continues to underpin company law. While sham, façade and fraud primarily trigger the invocation of the veil-piercing exception in limited circumstances, these grounds are not exhaustive, and much is left to the discretion and interpretation of the courts on the basis of individual cases.

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[1] [1896] UKHL 1.