Solaman vs Solaman case study

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Title: Solaman vs Solaman

Citation: (1897) AC 22 (1896) UKHL 1

Benches: Lord Halsbury L.C., Lord Watson., Lord Herschell., Lord Macnaghten., Lord Morris., Lord Davey.

Law Points:  Section 6,8,30 and 43 of Companies Act, 1862

Background

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Basically, company law is set up on the concept of Separate Legal Personality. In Corporate Jurisprudence, the main rule of jurisprudential practices is how a company exists and functions. The rule of “Separate Legal Personality” has been in many discussions of late, and it is still one of the most talked-about subjects still. And this principle wasfirmly planted in the case of Salomon v Salomon and is still taught as being the core of not only the company law but of the universal commercial laws of the world.

In general, a corporation is different from its shareholders and employees when it’s a question of identity. But if the individuals act in such a way which ends this separation, then they are held liable for consideration of their actions, in consonance with the company. The corporate veil is said to have lifted in such cases.

Facts

There was Mr Saloman, who made leather shoes for a large establishment. His sons had been wanting to be inducted as partners in his firm, so he converted his business into a limited company. The Company purchased his business for a value far greater than the actual value of the business. The two elder sons of Mr Saloman became directors of the said Company and were followed by his wife and five other sons, who became subscribers in the Company. Mr Saloman himself purchased 20,001 of the 20,007 shares of his company which were valued at UKP 1 Ea. The business was transferred on 1st June 1892. The Company was put into liquidation and the status of liquidation was as follows:

  • Realizable value of assets: UKP 6,000
  • Liabilities: Debentures: UKP 10,000
  • Liabilities: Unsecured Debts: UKP 7,000

After it was revealed that nothing would be left for the unsecured creditors after paying the debenture holders, there was a cause of action against Salomon according to the liquidator, and he held him liable to indemnify the company against its debts in trading.

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Issues

  1. Whether Salomon & Co. Ltd. Was a company, and if yes, how?
  2. Whether in truth, the artificial creation of the Company, is valid in the instant case?
  3. Whether the entire liability of clearing the debts of the Company, lied on Salomon?

Arguments

The main contentions of the liquidator was that though the Company Salomon & Co. Ltd. Was incorporated under the Act, there was never any sort of independent existence of the company. Rather, it was just a case of causing an eyewash to the public at large. Moreover, all the shares of the Company were held by Salomon himself. And this great preponderance had indeed made him the master of everything done under the umbrella of the said Company. The whole business under the umbrella was executed by him solely, and its nothing but a fraud.

Judgments

The House of Lords ruled that: Its worthwhile to look into the law itself before making any drawings on the reality of the said company. We will not add anything into the exact wording that it emanates. The Act provided that “Any seven or more persons, not-assembled for an unlawful purpose may, by giving their names to an MOA and in essentiality and in compliance with the provisions of the Act in respect of registration form a company with or without limited liability….”. The Act further provided that “every subscriber shall take at least one share.”

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That is the instant case, seven persons actually held the shares of the company, is not in doubt whatsoever. Hence the Company’s existence cannot be doubted, and it is deemed that the Company is real.

Further, on the question of all shares being held by the family of Salomon, the court came down on it saying that, the provisions of the Act do not stipulate that the persons can not be related to each other, or even can be related to each other for that matter. The Act does not say anything about the number of shares to be held by the members, which in this case was 1 each. Thus it cannot be said that the persons holding 1 share each were not members of the Company.

It should be immaterial to the creditor of the Company, whether the capital of the company is owned by seven persons of having equal shares each, or the capital is owned largely by a single person with the other persons having just a nominal share. There is no question that a Company will lose its identity, or even in danger of identity crisis if the majority of the capital is owned by a single entity. The Company at law is an altogether different identity from its subscribers. The Act is also silent on the question of the independence of subscribers or whether they should have a bulk interest in the undertaking formed in this way. The Act also does not speak anything about the need of own will and mind of the subscribers.

Lord Macnaghten said that “The Company is an not the same person when it comes at law from its stakeholders, and though it may be that, after inc, the business is exactly the same as it was before, and the same persons are managing, the same hands receiving the profitability, the Company, is, not in law, the agent of the stakeholders or the trustee for them. Nor are the subscribers as employees, liable in any shape or form, except to the extent and in the manner provided in the Act.”

Statutory and Judicial Exceptions

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One notable statutory exception to the case is that in case a fraud is established in the process of carrying out a business dealing in case of a one-person company, under the Insolvency Rules, the court can ask any erring party to compensate for the damages, to the extent that the court deems fit. On the judicial front, it is also a possibility that the individuals are constituted as principals and the company as an agent.

Conclusion

This case presented the need to reform the Company Laws. The concept of “Lifting the Corporate Veil” was introduced after this case, wherein no person could commit fraud under the veil of a Company, and thereby avoid liability of repayment towards the fraud so committed. However, a certain amount of proximity is required to be there for lifting this corporate veil.  The decision in the case alerted the English Bureaucracy. It was considered a necessity to form another Act or Statute to take care of future repercussions. A new Act called “Preferential Payments in Bankruptcy Amendments Act, 1897” was enacted and passed by the law-making agencies. Under the new Act, certain classes of creditors, or the preferred classes, take priority over the claims of a secured creditor which will be under a floating charge. However, the Act was replaced by another Act called the “Insolvency Act 1986” because the floating charge got converted to a fixed charge. Under the new Act, the priorities of the preferred creditors were promoted ahead of the floating charge holders.

References

www.translex.org

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www.lawlex.org

www.lawteacher.net

By – Tanya Singh, Banasthali University

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