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.
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