HEADLINE OF THE ARTICLE: – SALOMON VS SALOMON: THE CORNERSTONE OF CORPORATE PERSONALITY
Author: Divya Khatri, B.A.LL.B., Chaudhary Devi Lal University, Sirsa, Haryana.
TO THE POINT: –
Is it pertinent that a company is a separate entity from the person who supervises and steers it? If a person accumulates almost all the shares of a company, will he still be considered separate from that company? Many such Captivating Questions come to the mind of readers when they read cases like Salomon v. Salomon & co. ltd. [1897 AC 22.], which is a landmark case in corporate jurisprudence with worldwide significance. In this article, we will critically analyze the entire case, its judgement, what were its consequences and its relevance in today’s modern times. This verdict framed the doctrines of corporate personality and limited liability. This decision not only liberated Salomon from personal liability but also delivered clarity. Inexorably, it also brought forth the issue of misuse of the corporate form, which led to the evolution of exceptions such as the lifting of the corporate veil doctrine. This is not only a landmark case, but also a legal building block on which the whole principle of corporate personality is anchored. This is precisely why these days, we glance at companies as a legal person, which is completely distinctive from the person who owns and administers it.
ABSTRACT: –
Salomon v. Salomon co. ltd is one of the most momentous rulings in the field of corporate law is Salomon vs. Salomon, which is the reason behind the establishment of the doctrine of separate legal entity, corporate veil, and limited liability. In reference to this case, once the company is registered legally, then it is considered separate from the shareholders, even though the person owns most of the shares. In this article, we will critically analyze the case background, facts, issues, proof, arguments, other relevant case laws, reason behind the judgement, current scenario, significance, use of legal jargon and meticulously explore the final judgements which were given by the House of Lords. This case explains how the court safeguards the legal identity of Mr. Aron Salomon, although he had most of the shares in that company, or it can also be said that he controlled most of the business. Although, this decision shielded the individual investor and promoted entrepreneurship, but concerns arose that it may be misused which gave further development to the principle of lifting of corporate veil. We analyze this article along with the current modifications.
USE OF LEGAL JAGRON: –
Many prominent legal terms have been used to comprehend the Judgement properly. The term Separate legal entity means that once a company is incorporated, it becomes a separate person in the eyes of law. This gave rise to the concept of limited liability, which means that if the company confronts losses, the personal property of the shareholders will be shielded. Another important legal term is ‘lifting the corporate veil’ which means that under exceptional cases the court can consider the company and the shareholders as the exact same entity. Secured creditors mean the person who will be given priority in making payments in case of liquidation, and unsecured debtors will have to wait. Debentures are special loan papers, and the most important legal term is Alter Ego, which denotes an argument that Mr. Salomon and the company are the same legal person.
FACTS OF THE CASE [THE PROOF]: –
MR. Aron Salomon, a prestigious merchant in the field of leather, established his business as a sole owner in England . In 1892, he ultimately decided to incorporate his business into a limited liability company under the Companies Act of 1862 which required only seven members to officially establish a company To surpass the required number of seven members to officially establish the company, Mr. Salomon included his family members, out of which he had 20,001 shares. , although the total shares were 20,007 and therefore due to having so many shares he became the ultimate owner.
Once he incorporates the company, it purchases Salomon’s exciting leather business for £39,000. As per the purchase agreement, the company pays Salmon the money in three forms: –
£10,000 in the form of debentures.
£20,000, fully paid-up shares.
and the rest in the form of cash.
Debentures were immensely important as it had made Salomon a secured creditor due to which he got precedence over all unsecured creditors in case of insolvency. Initially the company was doing well, but within a short time, due to competition and a decrease in sales, the company faced financial difficulties, and the company went into liquidation. During liquidation the creditors who had not received their payments raised objections and said that Mr. Salomon should not give priority to getting the money just on the basis that he had secured debentures. They argued that the company is not separate from Salomon, but he is just its agent. He single-handedly controlled everything and hence he will be personally liable for the company’s debts.
The liquidators agreed with the creditor and filed a case against Mr. Salomon which eventually reached the House of Lords and gave a historical judgement. They claimed that the company was another name for Salmon and that he was treated as his alter ego. They also argued that Salomon did this to protect himself from personal liability and he is now hiding behind the separate legal entity of the company.
This dispute gave rise to a legal battle which started in the High Court, then moved forward in the Court of Appeal and subsequently reached the House of Lords, where a historical and final judgement was delivered which made this case a leading and landmark case in worldwide jurisprudence.
ISSUES INVOLVED
- The first issue was whether the company was different from Mr. Salomon or whether the company was just another name for Salomon.
- The second issue was whether Mr. Salomon should be personally liable for the company’s debts.
- Was the company genuinely formed to bypass creditors?
- Can a person be protected by law from personal liability even if he controls the company and holds most of its shares?
- Should the court overlook the separate legal identity of the company and see who is behind it?
COURT’S JUDGEMENT
The judges in House of lords, highest court of appeal in the UK gave judgment in favor of Mr. Salomon, and they said that: –
If the company gets registered, it becomes a separate legal person and it does not matter whether one person is holding the maximum or almost all the shares or even controlling the entire company? A legally registered company will be treated as a separate person from an owner.
The court further said that Mr. Salomon has followed all the legal steps which were essential. He did not break any law. Only because Mr. Salomon and his family have all shares. the company will not become illegal. Therefore, it was held that: –
The company is neither a fraud nor a cover.
Mr. Salomon will not be personally liable for the debt of the company.
He is a secure creditor, so he has full right to ensure that the money should be given to him first before the unsecured creditors.
REASONS BEHIND THE JUDGEMENT
- The company is a separate legal entity because once the company is properly registered by law, it becomes a separate person.
- Salomon had properly followed all the rules required by the law to form the company.
- The court cannot judge based on the reason on which Salomon formed the company if it is legally registered.
- The judges found that there was no evidence against the company being formed to commit fraud; it is just a business established in a legal manner.
- Protection of the principle of limited liability
- The company is not an agent of any shareholders.
- Secured creditors must get priority during liquidation
IMPORTANCE: –
- This case law explicitly laid the solid foundation of corporate personality.
- This case’s law introduced the doctrine of limited liability protection and ensured that personal assets of shareholders would not be at peril if the company faced any losses.
- This case encouraged business expansion as people realized that their personal property would not be affected.
- This case clearly demonstrates the rights of secured creditors.
- Highlighted the legal significance of registration.
- In reference to this case, the concept of separate legal entity has worldwide implications.
- This case is the foundation of the corporate veil principle
THE EXCEPTION OF VEIL PIERCING:
The judgement of this case confirmed that the company is a separate legal entity, and the court also said that this rule should not be misused under any circumstances.
Under certain special legal circumstances, the court can ignore the separate legal entity of the company and can see who is behind the company. This is what we call piercing of the corporate veil. This means that if any person uses the company for fraud or to avoid laws then in that case court will consider that company and that person as the same entity.
Main Exceptions are described below: –
- To protect against fraud or improper conduct.
- If the company is being ashamed or disgraced.
- To impose legal obligations.
- Where shareholders are the agent of the company.
- To protect national security.
- In matter of tax evasion.
CURRENT SCENARIO: –
The fundamental principle which was laid down in this case is still valid. Modern laws of India, UK and other countries still respect and follow this principle. Shareholders still enjoy the benefits of limited liability. Exceptions such as corporate veil were also introduced with respect to this case. the Companies Act, Insolvency and Bankruptcy Code, PMLA laws can make directors personally liable.
OTHER RELEVANT CASE LAWS
LEE VS LEE’S FARMING LTD. (1961)
The court held that the company and Mr. Lee are separate legal persons, and Mr. Lee was its employee, and his wife must get monetary compensation.
MACAURA VS. NORTHERN ASSURANCE CO. LTD (1925)
The honourable court held that as the timber was the company’s property, he will not be entitled to any compensation.
JONES VS LIPMAN. (1962)
The court held that the company was formed with the intention of committing fraud and to escape legal duties and therefore the court lifted the corporate veil and ordered Mr. Lipman to complete the sale of the land as he had originally agreed.
DELHI DEVELOPMENT AUTHORITY VS SKIPPER CONSTRUCTION CO. (1996)
The Supreme Court of India gave a judgement that the company was promoted to defraud the public and the court lifted the corporate veil and held the owners personally liable and gave orders to act against personal properties.
CONCLUSION: –
This landmark case laid the firm foundation of modern corporate law and established the principle that the company and the shareholders are separate entities. However, along with this protection, the potential danger of its misuse also escalated, which leads to the development of the concept of corporate veil so that fraud and manipulation of law could be avoided. Through many judicial pronouncements, a balance is being found between commercial freedom and legal accountability. Although its principles are very resilient, many modern laws have been adopted so that fairness, transparency and credibility can be maintained.
FAQ: –
- Which main doctrine was formed in Salomon vs Salomon & co. ltd.?
- The significant doctrine that was established in this case was Separate legal entity, which means that the company and the owner are separate Person in the context of the law.
- Is the principle established in the salmon case still applicable today?
- Yes, this principle is still applicable and the foundation of modern corporate law and even relevant in worldwide jurisprudence.
- What does lift the corporate veil mean?
- The meaning of corporate veil is that, under specified exceptional circumstances, the court can look at the person behind the legal identity of the company and can also order the resolution of debt using its personal assets.
- Which procedure is to be followed for registration of the company under the company Act?
According to the Companies Act 2013, a company can be registered online through the portal of the Ministry of Corporate Affairs. For this one must require PAN, ID PROOF, ADDRESS PROOF, SIGNATURE IN DIGITAL FORM, APPROVAL OF NAME OF THE COMPANY AND REGISTRATION FORM.
REFERENCES: –
House of Lords. (1897). Salomon v. Salomon & Co. Ltd., [1897] AC 22 (HL). Retrieved from https://corporations.ca/assets/Salomon%20v%20 Salomon.pdf
Privy Council. (1960). Lee v. Lee’s Air Farming Ltd., [1960] UKPC 33, [1961] AC 12. Retrieved from https://en.wikipedia.org/wiki/Lee_v_Lee%27s_Air_Farming_Ltd
Court of Appeal. (1933). Gilford Motor Co. Ltd. v. Horne, [1933] Ch 935. Retrieved from https://en.wikipedia.org/wiki/Gilford_Motor_Co_Ltd_v_Horne
Government of India. (2013). Companies Act, 2013, Section 2(62). Retrieved from https://indiankanoon.org/doc/199897958/
Supreme Court of India. (1996). Delhi Development Authority v. Skipper Construction Co., (1996) 4 SCC 622. Retrieved from https://www.lawfinderlive.com/archivesc/159131.htm
