Analyzing The Case of Salomon V A Salomon And Co Ltd.

Wide Details of the Case

 One of the most important cases related to the history of incorporation is the case of Salomon v A Salomon and Co Ltd.[1], which is even the cornerstone of the company law. With this case, legal personality protection, which is still valid today and limited liability principle for shareholders and partners, has come to the agenda.[2]

In the 19th century, Mr. Salomon was a successful leather merchant and he was a sole trader. There were not many people who could compete with Mr. Salomon. Mr. Salomon then established a limited liability company with 20007 shares and bought 20001 and shared the remaining 6 equally with family members. After establishing his company, he sold his previous leather business to his own company. After the payment made with the shares and the cash; there were still 10,000 pounds to be paid as a credit to Mr. Salomon. This was secured in the form of debenture. Mr. Salomon finished all procedures required for a company’s establishment and followed the regulations. The company had a total of 7 members with its family, but due to its shareholding, he was the company’s major shareholder and was therefore the main creditor of the company. After a certain period of time, Mr. Salomon’s newly established company didn’t work well and it was up to the company to go to liquidation. The real problem here was that the court would give a priority to Mr. Salomon who is a secured creditor or whether give it to another unsecured creditor. If the court gave priority to Salomon’s claim, nothing would be left for the other creditors. Because the company’s shares were very low and did not meet the required debt. The liquidator who appointed for the liquidation of the company said that Mr. Salomon took over the business of leather trade deliberately. He also considered that the company had acted as a representative of Salomon’s agency and that the debts had to be paid by Salomon to the unsecured creditors. After considering the liquidator’s argument and the process, the court justified the liquidator and told him that Mr. Salomon was responsible. After that Mr. Salomon appealed and when it was in the Court of Appeal Salomon’s objections were rejected again and the first-degree court was justified. It was decided that Salomon had abused the company and its limited liability principle. It was presumed that the principle of limited liability was valid only for fair and devoted shareholders, and it was argued that Salomon steered his company as it was in the leather trade business where he was the sole trader. However, House of Lords which is the last authority, rejected this matter and this concept was established as the basis of corporate law. It was unanimously accepted by House of Lords that company is a separate legal entity from its members and shareholders. It was repeated that all procedures for the formation of the company were completed. It was found by the House of Lords that the Salomon’s company was established in a legally valid manner and that the company’s debts were their own debts and members were not responsible for the payment of the company’s debts. For these reasons, as a legal entity, the company has been legally established pursuant to all the rules related to company laws. The management of the company by one person or all shareholders was decided not to make any difference. Therefore, the priority and preference were given to Mr. Salomon.[3]

Progress Brought by the Case

The foundation of company law is based on the concept that a company is a separate legal entity.[4] As a result, the company has a separate legal entity from its members and shareholders.[5] The company refers to a juristic person. In the words of Lord Baron Thurlow company means; “…have a conscience, when it has no soul to damn and no body to kick…”[6] When a company is established, company as a legal result of the concept that mentioned; is treated as a separate legal entity from its managers, shareholders and employees.[7] Thus, it is seen that a there is a metaphoric veil between the company and with its founders and shareholders.

The decision in Salomon v A Salomon and Co Ltd.[8], is vital because it will not hold individuals under threat of responsibility if the company goes bankrupt and encourages businesses to provide money. The main purpose behind the Salomon principle was to encourage investors to provide money to a business without further risk; however, the Salomon principles have been criticized for failing to provide creditors with adequate protection. It can be said that limited liability principle does not play an important role in small private companies with small capital. When companies want to borrow beyond their capacity, the protection of limited liability is lost. Banks and other creditors generally require managers or shareholders to provide personal collateral to be personally responsible for the company’s debts if it fails. In this sense, the advantages of limited liability are limited.[9]

Undoubtedly, the principle that came up with the Salomon v A Salomon and Co Ltd.[10], ensured the company’s separate legal personality, which allowed shareholders to personally leave this situation without minimum risk even if the company collapsed or went into liquidation. However, there are still cases where the court disregards this principle and takes exceptional decisions. Also, it remains a daunting task for academics and practitioners to find a basis on which to justify the veil-piercing. Because in such a case the personal opinions of the judges come to the fore and there is a moment when the facts of the case are important. Nevertheless, the Salomon principle is widely recognized by the courts and is maintained as far as possible. The principle of separate legal personality as set out in Article 16 of the Companies Act of 1997 constitutes the basis of company transactions in the courts. Case of Salomon v A Salomon and Co Ltd.[11] has become a case-law in corporate law as a turning point in the UK, and still holds the most important principle that forms the basis of companies today.

[1] [1897] AC 22

[2] Loraine Talbot, Critical Company Law, (2nd Ed, Routledge, 2016) p. 44

[3] Nicholas Bourne, Bourne on Company Law, (7th Ed, Routledge, 2016) p. 18-19

[4] Andreas Cahn & David Donald, Comparative Company Law: Text and Cases on the Laws Governing Corporations in Germany, the UK and the USA (Cambridge University Press, 2010) p.625

[5] Brian Coyle, Risk Awareness and Corporate Governance, (Global Professional Publishing, 2 Ed, 2004) p. 178.

[6] John Coffee, No soul to damn: No body to kick: An unscandalized inquiry into the problem of corporate punishment‘(79:3 Michigan Law Review 386, 1981)

[7] S 19(1) (b) Companies Act 71 of 2008

[8] [1897] AC 22

[9] Fang Ma, Company Law, (2nd Ed., Pearson, 2016) p.24-26

[10] [1897] AC 22

[11] [1897] AC 22