The separate legal personality of a UK company incorporation has remained under debate for years. It has been argued that whether in certain situations of liquidation the company can be allowed for piercing the veil by setting aside the concept of isolated lawful existence or not. The case of Salomon provides the most basic and detailed view of the separate legal personality at the time of bankruptcy of a company. This article discusses the Salomon case in detail.
Separate Legal Personality of a Company
A company when defined in terms of law, is a separate lawful existence. The fact may be explained as it has rights and responsibilities that are free from its members, that are the legal persons of the company. The actions taken by a company cannot be attributed solely to a particular person. Every step taken by the company should be owned by the company as a whole. It is stated that:
“A company is an isolated body with legal rights and responsibilities that are distinct and isolated from its members”.
It is a case related to one of the company formation of UK that was private and also related to the legal personality of such a company at the time of bankruptcy of the company.
It was a company that manufactured boot and shoe and belonged to Mr. Salomon. He had an experience of 30 years in trade. Although he had setup his business with little or no capital, yet his business was flourishing. The surplus assets were in great amount. Mr. Salomon had five sons, four of whom were working in his company but as servants only. His sons would pressurize him to allot them shares in the company. Therefore Mr. Salomon transformed his company into limited. He did this to expand his business and provide more for his family.
Transformation of the Status of the company
All the requirements mentioned in Companies Act 1862 were fulfilled for the transformation of company’s status. The memorandum and articles of association were prepared. A capital of 40000 pounds was decided, and there were 40000 shares whereas each share costed 1 pound. The appointment of initial directors was done by majority of the persons who had subscribed in the memorandum of the company. The directors were given authority to use all the powers that were not given in the statue or the articles for exercise in the general meeting. They were also given an express power of borrowing via debentures. The company held the status of a private company throughout its existence. The subscribers included his family members. Mr. Salomon and two of his elder sons were chosen as the initial directors of the company. The transfer was done and the payments under the contract were made duly. The price of the business was too much and apparently it rather depicted that the sum was decided by someone who was too fond of his business and there was no sound estimation done for the business. When the money started coming, sums of 20000 pounds were paid to Mr. Salomon for the payment of shares. Shares that were fully paid were given in return of the amount given to the company.
Downfall of the Company
The company did not survive for long. There was a great loss and depression in the company. The workmen went on strikes. The contracts of public bodies were split up and subjected to division between a number of firms. These contracts were the main source of income for Mr. Salomon. Efforts were made to save the company from loss but it only resulted in cramming the stores of the company with stock that could not be sold. Mr. and Mrs. Salomon gave loans to the company. The debentures of Mr. Salomon were cancelled by him. He reissued them to Mr. Broderip and gave the money he received in return to the company on loan. However, this only resulted in more devastation of the company. The interest on the loan could not be paid to Mr. Broderip. He immediately went for lawsuit. This resulted in the windup of the company and auction of the assets. The amount generated from the auction was enough to pay Mr. Broderip but not enough to pay on the debentures. The creditors who were not secured were ignored.
To counter the claim of Mr. Broderip, the liquidator claimed that the debentures were fraudulent and also claimed that the agreement which ratified the transfer of the business should be cancelled along with all the debentures. In return Mr. Salomon may pay the amount of purchase-money. An alternative solution given by the liquidator was that the payment of 20000 pounds should be made to Mr. Salomon as he had not been paid that amount.
Vaughan Williams J Held
The case was brought before Vaughan Williams J
After the suggestion given by the judge, the claim made by the liquidator was altered and brought in to accordance with the suggestion of the judge. Hence, the judge passed a verdict on the basis of his suggestion.
Lord Macnaghten about the verdict of Vaughan Williams J
Lord Halsbury LC Held
Inference from the Judgements regarding Salomon
Until 1992, the limit of members at the time of registration was first 7 and later reduced to 2. After the introduction of 12th Directive of EU, also known as Single- Member Companies in 1992, the limit was reduced to one member. Prior to the 1992 regulation, setting up a limited company UK that is private with one member was not possible. However, it was allowed for the companies having public formation of UK.
Companies (Single Member Private Limited Companies) Regulations 1992 states that:
However, even before 1992, it was allowed for all the shares to be held by a single member. Moreover, the member holding all the shares could simultaneously choose nominees for some of their shares. The nominees had to act in accordance with the original shareholder. Hence, single member companies have been accepted by different jurisdictions in the history.