Salmon v/s Salomon and Co Ltd

 

CASE COMMENT

Salmon v/s Salomon and Co Ltd [1897] AC 22

Equivalent citations: [1897] AC 22

PETITIONER:................................................. “SALMON”

                                                             V.

RESPONDENT:...........................................“SALMON & Co. Ltd.”

Introduction

Salomon vs. Salomon is a prime example of establishing the corporate veil. This is a groundbreaking ruling in a British company law case that firmly upheld the principle of corporate character as an individual legal entity, and therefore shareholders cannot be personally liable for the bankruptcy of the company.

Issues

The case involved the claims of certain unsecured creditors in connection with the liquidation of Salomon Ltd., a company in which Salomon is a major shareholder, and was therefore personally liable for the company's debts. So the question was whether shareholders/controllers could be liable for debts in excess of their contributions to share capital, separate from the separate legal entity of the company.

Facts of the case

Mr. Salomon runs a business as a leather goods merchant. In 1892, he founded the company "Salomon and company Ltd". Mr. Salomon, his wife and 5 children each hold a share in the company. Salomon's family members owned shares because the Companies Act at the time required seven shareholders. Mr. Salomon is also the general director of the company. The newly formed company bought the sole leather business.
Leather business is valued at 39,000 yen by Mr. Salomon. It's not an attempt at fair judgement; rather, it represents Mr. Salomon's confidence in the continued success of the business.
This price is paid in ₤10,000 of the debit note, giving the opportunity to all of the company's assets. 20,000 shares ₤1 each, balance ₤9,000 paid to Solomon in cash. At this point Mr. Salomon has also fully repaid all creditors of the proprietary business venture. Therefore, Mr. Salomon holds 20,001 shares of the company and his family holds the remaining 6 shares. Because of that, he also became the second creditor.
Therefore, Mr. Solomon's personal liability for the company's debt has completely changed from unlimited liability to limited liability.

Mr. Salomon is not only not personally liable for the debts of the company, but also claims, as the company's chief executive officer, a security interest in all of the company's assets. Thus, if the company goes bankrupt, Mr. Salomon is not only not personally responsible for the company's debts, but any remaining assets will be claimed by him to pay the company's debtsfor him.
Things did not go well for the leather business, however, and within a year Mr. Salomon had to sell his debit note to save the business. This did not bring about the desired effect and the company was put into forced liquidation. The liquidator on behalf of the unsecured creditors alleged that the company was a mere “alias” or agent for Mr. Salomon, and that Mr. Salomon was therefore personally liable for the debt of the company..

IMPLICATIONS OF SALOMON V SALOMON

Since the Salomon case, the SLP rule has been followed as an uncompromising precedent5 in a number of subsequent cases such as Macaura v Northern Assurance Co.6, Lee v Lee's Air Farming Limited and Farrar.

Damage The legal structure of the Corporate Curtain, thus formed, declares that a corporation has a distinct legal personality independent of the identities of its shareholders. Therefore, all the rights, obligations or responsibilities of a company other than those of its shareholders, which are only liable according to their share of capital, are called " Limited". This corporate novel is designed to enable groups of individuals to pursue economic goals as a single entity, without risk or individual liability. Accordingly, a company can own assets, perform contracts, incur debts, make investments, and assume other rights and obligations, independently of its members. Furthermore, since companies can then sue and be sued on their own behalf, it also facilitates the legal process. Ultimately, the most striking consequence of an SLP is a company that survives the deaths of its members.

 Rational

A simple reading of Section 61 (1) (b) discloses that a tax levy imposed under paragraph (b) is a tax on 'people,' which includes natural persons. Individuals who belong to a class that practises any profession or art, or who carry on a trade or calling in the municipality, are the ones who are most impacted. It would be reading terms into the legislation that do not exist to declare that people jointly carrying on a trade in the municipality cannot be taxed individually. There are no terms in clause (b) or elsewhere in the Act that expressly or indirectly exclude or prohibit persons engaged on a collective commerce in the municipality from being taxed as individuals.Because the persons were working in a partnership firm, which is not a legal entity separate and distinct from the partners under the Partnership Act of 1932, they can be classed as individuals in their own right.

Section 86 of the Municipal Act specifically bans a person who is unhappy with an assessment from seeking recourse in any place or manner other than the Municipal Act. As a result, Sections 84 and 86 of the Municipal Act imply that the Civil Court has no jurisdiction over a party's dispute relating to an assessment or an assessment principle under the Act.

Judgement

Court of appeal adjudicated in favour of liquidator contentions over the appellant and found Aron Salomon responsible to indemnify the debts of unsecured creditors of the company. The court considered the company’s business as Salomon’s own business and the signatories of the memorandum of association were dummies and the company was working just as Aron Salomon’s agent. The appellant was the Principal and earned excessive money by this business thus he owed to indemnify the company’s debt. Court of appeal considered the company as a personal liability of Salomon by ignoring company as a separate legal identity.

Conclusion

Overall, the Salomon case still prevails and continues to underpin British company law. While impersonation, one-sidedness and fraud primarily trigger the invocation of exceptions through the veil in a limited number of cases, these grounds are incomplete and much of the rest is up to the discretion. and interpretations of the courts on a case-by-case basis.