- Mr Salomon was a shoemaker in England. His sons wanted to become his business partners so he converted his business into a limited company (A Salomon & Co Ltd).
- A Salomon & Co Ltd purchased Mr Salomon’s business for above market value.
- His wife and his five children became subscribers. The two eldest sons became directors of the company.
- Mr Salomon was allocated 20,001 of the company’s 20,007 shares.
- The company gave Mr Salomon £10,000 in debentures and received an advance of £5,000 from Edmund Broderip, on security of the debentures.
- Salomon’s business eventually failed and it defaulted on its interest payments on the debentures (half held by Broderip). Broderip sued to enforce his security.
- The company went into liquidation. Broderip was repaid his £5,000. This left £1,055 company assets remaining. Salomon claimed this amount under his retained debentures. This would leave nothing for unsecured creditors.
- The company’s liquidator argued that Salomon should be responsible for the company’s debts. Salomon sued for the £1,055.
- Was the formation of A Salomon & Co Ltd a fraud intended to defeat creditors?
- After several sets of proceedings in lower courts, the appeal landed in the House of Lords.
- The Companies Act 1862 (UK) did not require shareholders to be independent of the majority shareholder.
- A Salomon & Co Ltd was legally constituted and it was not the role of judges to read limitations into the statute in a manner that they considered preferable.
“Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon… If it was not, there was no person and no thing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not.”
(Lord Halsbury LC at page 22)
“It has become the fashion to call companies of this class “one man companies.” …If [this] is intended to convey the meaning that a company which is under the absolute control of one person is not a company legally incorporated, although the requirements of the Act of 1862 may have been complied with, it is inaccurate and misleading: if it merely means that there is a predominant partner possessing an overwhelming influence and entitled practically to the whole of the profits, there is nothing in that that I can see contrary to the true intention of the Act of 1862, or against public policy, or detrimental to the interests of creditors. If the shares are fully paid up, it cannot matter whether they are in the hands of one or many. …It was argued that the agreement for the transfer of the business to the company ought to be set aside, because there was no independent board of directors, and the property was transferred at an overvalue. There are …two answers to that argument. In the first place, the directors did just what they were authorized to do by the memorandum of association. There was no fraud or misrepresentation, and there was nobody deceived. In the second place, the company have put it out of their power to restore the property which was transferred to them. It was said that the assets were sold by an order made in the presence of Mr. Salomon, though not with his consent, which declared that the sale was to be without prejudice to the rights claimed by the company by their counter-claim. I cannot see what difference that makes.”
(Lord Macnaghten at page 54)
Full text is available here: http://www.bailii.org/uk/cases/UKHL/1896/1.html
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