Solomon v Solomon & Co. Ltd – Case
study analysis
Human beings are generally legal person but humanity is a state of nature
and legal personality is an artifcial construct, which may or may not be
conferred. The origin of corporation lies in a logical extension of this
separation of humanity from legal personality as the group of humans who
are engaged in a common activity could attempt to simplify their joint
activity by gaining legal personality from the ventureFacts of
Solomon v Solomon
Solomon was a leather merchant who converted his business into a Limited Company
as Solomon & Co. Limited (the ‘company’). The company so formed consisted on
Solomon, his wife and fve of his children as members. The company purchased the
business of Solomon for £39,000; the purchase consideration was paid in terms of
£10,000 debentures conferring a charge over the company’s assets, £20,000 in fully
paid, £1 share each and the balance in cash.
The company in less than one year ran into difculties and liquidation proceedings
commenced. The assets of the company were not even sufcient to discharge the
debentures (held entirely by Solomon himself). And nothing was left for unsecured
creditors. The liquidator on behalf of unsecured creditors alleged that the company was
a sham and mere alias or agent for Salomon.
Court of Appeal:
The British Court of Appeal considered the matter and Kay LJ stated that
“The statue was intended to allow seven or more persons, bona fde associated for the
purpose of trade to limit their liability, under certain conditions and to become a
corporation. But shareholders of Salomon & Co Ltd. were not intended to legalize the
pretended association for the purpose of enabling an individual to carry on his business
within; limited liability in the name of joint stock company.”
Thus, the focus of court of appeal was that the six family members never intended to
take part in the business and only held the shares to fulfll the technicality required by
the companies act.
House of Lords:
Lord Macnaghten held that ‘the company is diferent person altogether from
subscribers… and, though it may be that after incorporation the business is precisely
the same as it was before and same persons are managers, and same hand receive the
proft, the company is not agent for subscriber or trustee for them. Nor are the
subscribers as member liable, in any shape or form, except to the extent and manner
prescribed by the Act.’
It can be summarized from the above discussion that the House of Lord unanimously
held that the company had been validly constituted, since the Companies Act only
required only seven (7) members holding at least one (1) share each. It said nothing
about their being independent, or that there should be anything like a balance of power
in the constitution of the company. Therefore, the business belonged to the company
and not to Solomon rather Solomon was its agent. The company was not agent of
Solomon.
Principles Laid in Solomon v Solomon
The House of Lords lay down the following basic principles of a company:
Artifcial Person
The company is a juristic person; however, it does not possess the body of a natural
being. It exists only in contemplation of law. Being an artifcial person, it has to depend
upon natural persons, namely, the directors, ofcers, shareholders, and corporate
managers, etc., for its management and day to day running. However, these individuals
only represent the company and accordingly whatever they do within the scope of the
authority conferred upon them and in the name and on behalf of the company, they bind
the company and not themselves.
• Limited Liability
One of the principal advantages of trading through the medium of a limited company is
that the members of the company are only liable to contribute toward payments of its
debts to a limited extent. If the company is limited by shares, the shareholders liability to
contribute is measured by the nominal value of the shares he or she holds. In other
words, once he or she or someone who held the shares previously has paid that
nominal value plus any premium agreed on when the shares were issued, he is no
longer liable to contribute anything further.
However, the companies may be formed with unlimited liability of members, or members
may guarantee a particular amount. In such cases, liability of the members shall not be
limited to the nominal or face value of their shares and the premium, if any, unpaid
thereon. In the case of unlimited liability companies, members shall continue to be liable
till the whole amount has been paid of. If a company is unable to pay its debts, its
creditors may petition the court to wind it up.
These principles have been endorsed in many other cases, for instance, in the case
of Lee v Lee’s Air Farming Limited[4], ‘L’ formed a company with a share capital of three
thousand pounds, of which 2999 pounds were held by ‘L’. He was also the sole
governing director. In his capacity as the controlling shareholder, ‘L’ exercised full and
unrestricted control over the afairs of the company. ‘L’ was qualifed pilot also and was
appointed as the chief pilot of the company under the articles and drew a salary for the
same. While piloting the company’s plane he was killed in an accident. As the workers
of the company were insured, workers were entitled for compensation on death or injury.
The question was while holding the position of a sole governing director could ‘L’ also be
an employee/worker of the company. It was held that the mere fact, someone was the
director of the company was no impediment to his entering into a contract to serve the
company. If the company was a legal entity, there was no reason to change the validity
of any contractual obligations which were created between the company and the
deceased. The contract could not be avoided merely because ‘L’ was the agent of the
company in its negotiations. Accordingly, ‘L’ was an employee of the company, and,
therefore, entitled to compensation claim.
Lifting the Veil of Incorporation
In view of above discussion, the chief advantage of incorporation from which all others
follow is, of course, the separate legal entity. In reality, however, the business of the
artifcial person is always carried on by, and for the beneft of, some individuals. In the
ultimate analysis, some human beings are the real benefciaries of the corporate
advantages, ‘for while, by fction of law, a corporation is a distinct entity, yet in reality, it
is an association of persons who are in fact the benefciaries of corporate property’
– Gallaghar v. Germania Brewing Company.
It may, therefore, happen that the corporate personality of the company is used to
commit frauds or improper illegal acts. Since an artifcial person is not capable of doing
anything illegal or fraudulent, the facade of corporate personality might have to be
removed to identify the persons who are really guilty. This is known as lifting the
corporate veil. Although, in general, the courts do not interfere and essentially go by the
principle of separate entity as laid down in the Solomon’s case as discussed above.
However, with the passage of time, the courts come to realize that there can be
fraudulent and mischievous schemes drawn by the promoters and members of the
companies and the principle of Solomon’s case cannot be extended to each and every
company. It may be in the interest of members in general, or in public interest to identify
and punish the persons who misuse the medium of corporate personality. The
circumstances under which the courts may lift the corporate veil may broadly be
grouped under the following two heads:
Statutory Provisions
The veil of corporate personality may be lifted in certain cases or pierced as per express
provisions of the company law. In other words, the advantage of ‘distinct entity’ and
‘limited liability’ may not be allowed to be enjoyed in certain circumstances. Such cases
may be:
Reduction of membership: If at any time, the number of members is reduced below
the statutory minimum, and the companies carries on business beyond that minimum
while the number is so reduced, the law can pierce the corporate veil under the relevant
law and makes persons behind the company personally liable (in spite of their limited
liability otherwise).
Misrepresentation in prospectus: In case of misrepresentation in a prospectus, every
director, promoter and every other person, who authorizes such issue of prospectus,
incurs liability toward those who subscribed for shares on the faith of untrue statement.
Mis-description of name: Where ofcer of a company signs on behalf of the company
any contract, bill of exchange, or any kind of order of money, such person shall be
personally liable if the name of the company is either not mentioned, or is not properly
mentioned.
Fraudulent conduct: Where in case of winding up of the company by members of the
company, it appears that any business of the company has been carried on with intent
to defraud creditors of the company, or any other person, or for any fraudulent purpose,
the court may hold such persons liable personally for any liability of the company.
Liability for ultra vires acts: Directors and other ofcers of a company will be
personally liable for all those acts which they have done on behalf of a company if the
same are ultra vires of the company.
• Judicial Interpretations
It is difcult to deal with all the cases in which courts have lifted or might lift the
corporate veil. Some of the cases where the veil of incorporation was lifted by judicial
decisions may be discussed to form an idea as to the kind of circumstances. Here are
some examples of it:
The Salomon principle held that the company was not an agent of its shareholders;
however, it did not exclude the possibility of Agent-Principle relationship. The case was
discussed in Smith, Stone & Knight Ltd vs. Birmingham Corp. the court observed that
the company took over a business and continued it through a subsidiary company which
was treated as department. Further, the parent company claimed compensation
because of injury by the corporation’s use of its power of compulsory acquisition over
the subsidiary land. Thus, subsidiary was agent, employee, or tool of the parent.
In Zaist v. Olson the court separated the fction of capitalist control and actual control. It
was held that ‘control not mere majority but complete domination, not only to fnance but
also to policy; such control must have been used by defendant to commit some wrong.
The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of…’
Conclusion
It may, therefore, be concluded in the light of above discussion that though it is frmly
established ever since Solomon’s case that a company is an independent and legal
personality distinct from the individuals who are its members, it has since been held that
the corporate veil may be lifted, the corporate personality may be ignored and the
individual members recognized for who they are in certain exceptional circumstances.
Generally, and broadly speaking the corporate veil may be lifted where the statute itself
contemplates lifting the veil or fraud, or improper conduct is intended to be prevented. It
is neither necessary nor desirable to enumerate classes of cases where lifting the veil is
permissible, since that must necessarily depend on relevant statutory or other
provisions, the object sought to be achieved, the impugned conduct, the involvement of
element of public interest, the efect on parties who may be efected, etc. It is also noted
that many of the recent developments in veil lifting have involved claims of tortious
liability. Indeed tortious liability is one of the fault lines created by limited liability. Normal
creditors when dealing with the limited liability company have an opportunity to access
the risk of doing business. They can opt to secure their lending, charge a premium for
that risk or do both.
doc_277970373.docx
study analysis
Human beings are generally legal person but humanity is a state of nature
and legal personality is an artifcial construct, which may or may not be
conferred. The origin of corporation lies in a logical extension of this
separation of humanity from legal personality as the group of humans who
are engaged in a common activity could attempt to simplify their joint
activity by gaining legal personality from the ventureFacts of
Solomon v Solomon
Solomon was a leather merchant who converted his business into a Limited Company
as Solomon & Co. Limited (the ‘company’). The company so formed consisted on
Solomon, his wife and fve of his children as members. The company purchased the
business of Solomon for £39,000; the purchase consideration was paid in terms of
£10,000 debentures conferring a charge over the company’s assets, £20,000 in fully
paid, £1 share each and the balance in cash.
The company in less than one year ran into difculties and liquidation proceedings
commenced. The assets of the company were not even sufcient to discharge the
debentures (held entirely by Solomon himself). And nothing was left for unsecured
creditors. The liquidator on behalf of unsecured creditors alleged that the company was
a sham and mere alias or agent for Salomon.
Court of Appeal:
The British Court of Appeal considered the matter and Kay LJ stated that
“The statue was intended to allow seven or more persons, bona fde associated for the
purpose of trade to limit their liability, under certain conditions and to become a
corporation. But shareholders of Salomon & Co Ltd. were not intended to legalize the
pretended association for the purpose of enabling an individual to carry on his business
within; limited liability in the name of joint stock company.”
Thus, the focus of court of appeal was that the six family members never intended to
take part in the business and only held the shares to fulfll the technicality required by
the companies act.
House of Lords:
Lord Macnaghten held that ‘the company is diferent person altogether from
subscribers… and, though it may be that after incorporation the business is precisely
the same as it was before and same persons are managers, and same hand receive the
proft, the company is not agent for subscriber or trustee for them. Nor are the
subscribers as member liable, in any shape or form, except to the extent and manner
prescribed by the Act.’
It can be summarized from the above discussion that the House of Lord unanimously
held that the company had been validly constituted, since the Companies Act only
required only seven (7) members holding at least one (1) share each. It said nothing
about their being independent, or that there should be anything like a balance of power
in the constitution of the company. Therefore, the business belonged to the company
and not to Solomon rather Solomon was its agent. The company was not agent of
Solomon.
Principles Laid in Solomon v Solomon
The House of Lords lay down the following basic principles of a company:
Artifcial Person
The company is a juristic person; however, it does not possess the body of a natural
being. It exists only in contemplation of law. Being an artifcial person, it has to depend
upon natural persons, namely, the directors, ofcers, shareholders, and corporate
managers, etc., for its management and day to day running. However, these individuals
only represent the company and accordingly whatever they do within the scope of the
authority conferred upon them and in the name and on behalf of the company, they bind
the company and not themselves.
• Limited Liability
One of the principal advantages of trading through the medium of a limited company is
that the members of the company are only liable to contribute toward payments of its
debts to a limited extent. If the company is limited by shares, the shareholders liability to
contribute is measured by the nominal value of the shares he or she holds. In other
words, once he or she or someone who held the shares previously has paid that
nominal value plus any premium agreed on when the shares were issued, he is no
longer liable to contribute anything further.
However, the companies may be formed with unlimited liability of members, or members
may guarantee a particular amount. In such cases, liability of the members shall not be
limited to the nominal or face value of their shares and the premium, if any, unpaid
thereon. In the case of unlimited liability companies, members shall continue to be liable
till the whole amount has been paid of. If a company is unable to pay its debts, its
creditors may petition the court to wind it up.
These principles have been endorsed in many other cases, for instance, in the case
of Lee v Lee’s Air Farming Limited[4], ‘L’ formed a company with a share capital of three
thousand pounds, of which 2999 pounds were held by ‘L’. He was also the sole
governing director. In his capacity as the controlling shareholder, ‘L’ exercised full and
unrestricted control over the afairs of the company. ‘L’ was qualifed pilot also and was
appointed as the chief pilot of the company under the articles and drew a salary for the
same. While piloting the company’s plane he was killed in an accident. As the workers
of the company were insured, workers were entitled for compensation on death or injury.
The question was while holding the position of a sole governing director could ‘L’ also be
an employee/worker of the company. It was held that the mere fact, someone was the
director of the company was no impediment to his entering into a contract to serve the
company. If the company was a legal entity, there was no reason to change the validity
of any contractual obligations which were created between the company and the
deceased. The contract could not be avoided merely because ‘L’ was the agent of the
company in its negotiations. Accordingly, ‘L’ was an employee of the company, and,
therefore, entitled to compensation claim.
Lifting the Veil of Incorporation
In view of above discussion, the chief advantage of incorporation from which all others
follow is, of course, the separate legal entity. In reality, however, the business of the
artifcial person is always carried on by, and for the beneft of, some individuals. In the
ultimate analysis, some human beings are the real benefciaries of the corporate
advantages, ‘for while, by fction of law, a corporation is a distinct entity, yet in reality, it
is an association of persons who are in fact the benefciaries of corporate property’
– Gallaghar v. Germania Brewing Company.
It may, therefore, happen that the corporate personality of the company is used to
commit frauds or improper illegal acts. Since an artifcial person is not capable of doing
anything illegal or fraudulent, the facade of corporate personality might have to be
removed to identify the persons who are really guilty. This is known as lifting the
corporate veil. Although, in general, the courts do not interfere and essentially go by the
principle of separate entity as laid down in the Solomon’s case as discussed above.
However, with the passage of time, the courts come to realize that there can be
fraudulent and mischievous schemes drawn by the promoters and members of the
companies and the principle of Solomon’s case cannot be extended to each and every
company. It may be in the interest of members in general, or in public interest to identify
and punish the persons who misuse the medium of corporate personality. The
circumstances under which the courts may lift the corporate veil may broadly be
grouped under the following two heads:
Statutory Provisions
The veil of corporate personality may be lifted in certain cases or pierced as per express
provisions of the company law. In other words, the advantage of ‘distinct entity’ and
‘limited liability’ may not be allowed to be enjoyed in certain circumstances. Such cases
may be:
Reduction of membership: If at any time, the number of members is reduced below
the statutory minimum, and the companies carries on business beyond that minimum
while the number is so reduced, the law can pierce the corporate veil under the relevant
law and makes persons behind the company personally liable (in spite of their limited
liability otherwise).
Misrepresentation in prospectus: In case of misrepresentation in a prospectus, every
director, promoter and every other person, who authorizes such issue of prospectus,
incurs liability toward those who subscribed for shares on the faith of untrue statement.
Mis-description of name: Where ofcer of a company signs on behalf of the company
any contract, bill of exchange, or any kind of order of money, such person shall be
personally liable if the name of the company is either not mentioned, or is not properly
mentioned.
Fraudulent conduct: Where in case of winding up of the company by members of the
company, it appears that any business of the company has been carried on with intent
to defraud creditors of the company, or any other person, or for any fraudulent purpose,
the court may hold such persons liable personally for any liability of the company.
Liability for ultra vires acts: Directors and other ofcers of a company will be
personally liable for all those acts which they have done on behalf of a company if the
same are ultra vires of the company.
• Judicial Interpretations
It is difcult to deal with all the cases in which courts have lifted or might lift the
corporate veil. Some of the cases where the veil of incorporation was lifted by judicial
decisions may be discussed to form an idea as to the kind of circumstances. Here are
some examples of it:
The Salomon principle held that the company was not an agent of its shareholders;
however, it did not exclude the possibility of Agent-Principle relationship. The case was
discussed in Smith, Stone & Knight Ltd vs. Birmingham Corp. the court observed that
the company took over a business and continued it through a subsidiary company which
was treated as department. Further, the parent company claimed compensation
because of injury by the corporation’s use of its power of compulsory acquisition over
the subsidiary land. Thus, subsidiary was agent, employee, or tool of the parent.
In Zaist v. Olson the court separated the fction of capitalist control and actual control. It
was held that ‘control not mere majority but complete domination, not only to fnance but
also to policy; such control must have been used by defendant to commit some wrong.
The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of…’
Conclusion
It may, therefore, be concluded in the light of above discussion that though it is frmly
established ever since Solomon’s case that a company is an independent and legal
personality distinct from the individuals who are its members, it has since been held that
the corporate veil may be lifted, the corporate personality may be ignored and the
individual members recognized for who they are in certain exceptional circumstances.
Generally, and broadly speaking the corporate veil may be lifted where the statute itself
contemplates lifting the veil or fraud, or improper conduct is intended to be prevented. It
is neither necessary nor desirable to enumerate classes of cases where lifting the veil is
permissible, since that must necessarily depend on relevant statutory or other
provisions, the object sought to be achieved, the impugned conduct, the involvement of
element of public interest, the efect on parties who may be efected, etc. It is also noted
that many of the recent developments in veil lifting have involved claims of tortious
liability. Indeed tortious liability is one of the fault lines created by limited liability. Normal
creditors when dealing with the limited liability company have an opportunity to access
the risk of doing business. They can opt to secure their lending, charge a premium for
that risk or do both.
doc_277970373.docx