The Salomon Vs A Salomon Company Limited Case - Essay Example

? Salomon v. Salomon [1897] AC 22 No: Roll No: “The company is at law a different person altogether from those forming the company […] The Company is not in law the agent of the subscribers or trustees for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act …” (Per Lord MacNaughten in Salomon v. Salomon [1897] AC 22) Salomon v. Salomon [1897] AC 22 Salomon was the owner of leather boots and shoes making company for the last 30 years. The company was located at White chapel High Street in the United Kingdom. His family was comprised of a daughter and 5 sons. His sons were keen to join father’s business as partners. Naturally, the father had to turn his business from sole proprietorship to Private Limited Company in line with the parameters of Companies Act 1862. After completion of this process, the wife and five sons become shareholders of the company. The shareholders of the company appointed two eldest sons as directors (Goulding, 1999). The Salomon Vs A Salomon Company Limited case was the landmark case in the history of United Kingdom. In that case, lords had unanimously clearly defined the doctrine of corporate personality. According to the decisions of Lords, which was in line with Company’s Act 1862, creditors of an insolvent company cannot initiate legal action against the shareholders to pay off outstanding liabilities (Goulding, 1999). The judge who heard the case earlier opined the deal amongst family members as “extravagant” and not “anything that can be called a business like reasonable estimate of value” because the newly established company paid the owner pounds 20,000 besides pounds 10,000 in shape of debenture which was secured by creating legal and equitable mortgage on the property of the company (Janet & Koutsias, 2009). The irony is that just after the incorporation of business into private limited company, an array of strikes started in the shoe making industry thus compelled the government to diversify its orders to other contractors in order to ensure un-interrupted supply of boots and shoes to the government. To meet the financial losses and to rehabilitate the company back to business borrowed pounds 5,000 from Mr. Edmund Broderip (Salomon v A Salomon & Co Ltd). Alternatively, the company assigned debentures of the same amount. The loan was acquired on a nominal interest against mortgage of property of the business entity (French, 2009). The losses of the company come to such an impasse that it was not in a position even to pay off the interest amount. Keeping in view the situation, the said creditor sued the company to foreclose the assets of the company. The company went into liquidation (French, 2009). The creditor got back his money from liquidator. Mr. Salomon received back his security which was held by the liquidator (Salomon v A Salomon & Co Ltd). Later on the liquidator and Mr. Salomon as defendant counter claimed since debentures become ineffective as a result of fraudulent transaction. Therefore, liquidator pleaded for all the money back that was invested in the business of Private Limited Company since its formation, revalidation of business contract with the government, call back the payable amount plus void of debentures (Salomon v A Salomon & Co Ltd). Initially the High Court accepted the claim of Mr. Edmund Broderip. According to Justice Williams “it was undisputed that 20,000 shares were fully paid up and the company had a right to 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 claim was materialized accordingly (Salomon v A Salomon & Co Ltd). While confirming the decisions of Justice Williams on the grounds that Mr. Salomon had misused the authority, responsibility, perks that bestowed upon the genuine shareholders and not the mock shareholders by the Legislative body of the country. The other view of Justice Lindley, who is an authority on partnership law, was of the view that the business establishment was working on behalf of Mr. Salomon, hence, liable to pay off the company’s liabilities (Salomon v A Salomon & Co Ltd). Under section 18 of the then Companies Act 1862 the company can be regarded as private limited company since it meets all the parameters required for the establishment of a company. The purpose behind the formation of a private limited company determines it legality or illegality (Companies Act 2006). If a person carries business by incurring debts and liabilities of other persons whose benefits linked with the business, the principal is be liable for payment of debts. The role of the company here is as an agent of Salomon since the other stake holders have no visible role to play and their names have only been used to shelter Salomon, absolving himself from liabilities as and when arises (Companies Act 2006). In re George Newman & Company, which was the similar case of Salomon & Salomon Private Company Limited, the court was of the view that arising of liabilities does not solely depends on the facts that Salomon was the owner of the entire shares of the company. His role was limited up to the formation of the company, modus operandi of its formation and its effective operations (Goulding, 1999). Prima facie, there is an apprehension that the Salomon and his associates were aware of the tricks of the trade and very much alive of the circumstances to come on the surface in the near future keeping in view the declining business (Gower and Davies, 2008). The parliament should ponder on this if it is camouflaging and draft a law with necessary safety valves to be in place to safeguard the interest of the honest creditors from cheating at the hands of white color criminals. The court therefore, treated formation of such private limited company with ill intentions amounts to defrauding the real creditors (Judge, 2010). The apex legal body (House of Lords) unanimously voids the decisions of Court of Appeal and the High Court since in their opinions; the company was constituted in accordance with the law and no intention of cheat and fraud is evidenced. In view the Lord Hals bury LC, 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 shareholders over the others." (Sealy & Worthington, 2007) In his landmark decision Lord McNaughten held that when a memorandum is duly signed and registered, although the firm is formed by seven members, are considered as corporate body since it came into being, enables to do or perform all functions of a corporate company (Salomon v A Salomon & Co Ltd). As per said Lord, “The company is at law a different person altogether from the subscribers to the memorandum, though it may be that after incorporation, the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law, the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.” (Salomon v A Salomon & Co Ltd) A private limited company can carry out legal business with restricted responsibilities. The disclosure of a person’s name in case of failure of business transaction may attract bankruptcy laws. In so many ways of raising funds, debenture is one of the tools for raising funds by the business entity whereas a sole trader does not enjoy that sort of outlet. In accordance with law member of any company can hold as much shares as he / she can hold. Further, each and every creditor has the right to have the best security to secure his or her investments (Cotterell, 1992). The House of Lords set aside the impugned orders of Court of Appeal and the High Court based on wrong/misconception. The intention of Mr. Salomon was in fact not to deceit or to defraud the subscribers but to widen the scope of his business to meet the demands of purchasers and to save the company from colossal losses (Salomon v A Salomon & Co Ltd, 1897). The man who is doing the same business for the last 30 years and earned fame and wealth cannot put his name and fame at stake. The losses in business attributed to misfortunes. The good intention of the owner can best be ascertained with the fact that he raised 50001in shape of debentures by way of creating charge over the assets of the company, which shows his strong confidence in the capacity and capability of the company to deliver the goods well in time as was done earlier (Puig, 2000). In the event of liquidation, the investor of a trading company may enjoy the benefit of preferential share holder as the money invested by the creditors in the business within a given time before the winding-up process starts. Under the circumstances debentures holder(s) stepped in, to secure his or her interest (Kershaw, 2009). Company under the absolute control of one person cannot be considered legally incorporated despite meeting all the requirements of Company’ Act 1862 (Cotterell, 1992). Usually the private limited company runs under the independent Board of Directors set out the goals and direction of the company. In the mentioned scenario the business was influenced by the directors of the company who are the sons of the sole proprietorship leaving others as silent spectators or to be treated as dummies (Cotterell, 1992). If the shares are paid in full, no matter, they are in the hands of one, few or many. If it is not paid in full, solvency of an individual can easily be determined in meeting the company’s obligations. The directors of the company acts as permitted them by the Memorandum and Article of Association of the company. They cannot go beyond the limitations as prescribed by the said memorandum and article of association (Puig, 2000). By all means the directors of the company have to be within the ambit of the discretion as conferred videos the above memorandum. The memorandum and Article Association of the Company has a vital role in forming and directing the activities of the company. In this particular case since no fraud, misrepresentation, and deceived were found by the learned House of Lords, hence turned down the decisions of subordinate judiciary (Kershaw, 2009). For the last ten years in England, Ireland and elsewhere the competent court of law in their jurisdiction, found companies involved in shady business or smack of fraudulent transactions, disregards the company’s separate legal status (Kershaw, 2009). An in-depth study of the case indicates that the formation of said company as per the unanimous decisions of House of Lords was legal and as per the prevalent company’s Act. However, where the competent court of law found that the formation of the company meant for some shady business, to deceit the honest creditors or to defraud the investors, disrepute the legal corporate entity of the company (Gower and Davies, 2008). The companies in question in accordance with the law of land neither the agent of the subscribers, nor the trustee of the company. The subscribers as members are liable, in any shape or mode, except to the extent and in the manner as provided by the existing Company’s Act 2006 (Companies Act 2006). We may refer to the dictum of Lord Macnaghten in the case of Salomon v Salomon & Co (1897) AC 22 wherein it was categorically stated that "The company is at law a different person altogether from its subscribers and after incorporation of the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers, as members, liable, in any shape or form, except to the extent and in the manner provided by the act.” (Salomon v A Salomon & Co Ltd) The relationship between members and their company are the managers who manage the business affairs and receive the profits earned by the company and not the agents or trustee of the company. The motive of the company’s subscribers has no relevance in determining the corporate liability as far as the motive of company’s subscribers is concerned. It is true to say that the subscribers or members are not liable in any shape or form for the company’s liabilities. The liability of a company itself is unlimited with a view that the companies have to pay they owed with the assets they have but the liability of those who invested their capital in a company is (generally) limited to their shares. Bibliography Companies Act 2006. (c.46) London: HMSO. [Accessed on 12 November 2011] http://www.opsi.gov.uk/ACTS/acts2006/pdf/ukpga_20060046_en.pdff Cotterell, R. (1992). The Sociology of Law. 2nd edn. London: Butterworths. French, Derek. (2009). Blackstone’s Statutes on Company Law. London: Oxford University Press. Goulding, Simon. (1999). Company Law. London: Cavendish Publishing Limited. Gower and Davies. (2008). Principles of Modern Company Law. New York: Sweet and Maxwell. Janet, Dine and Koutsias, Marios. (2009). Company Law. 7th ed. London: Palgrave Macmillan. Judge, Stephen. (2010). Business Law. 4th ed. London: Palgrave Macmillan. Kershaw, David. (2009). Company Law in Context. London: Oxford University Press. Puig, Gonzalo V. (2000). A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine. Murdoch University, Vol. 7, no. 3. [Accessed on 12 November 2011] http://www.murdoch.edu.au/elaw/issues/v7n3/puig73a_text.html Salomon v A Salomon & Co Ltd [1897] AC 22. Sealy, L & Worthington, Sarah. (2007). Cases and Materials in Company Law. London: Oxford University Press. Read More