Solution
Robert answered on
Dec 22 2021
Salomon v Salomon 1
Salomon v Salomon
Course Name:
Course Code:
Student’s Name:
Student Registration Number:
Supervisor’s Name:
Salomon v Salomon 2
Table of Contents
Salomon v Salomon Course Name: Course Code: Student‟s Name: Student Registration
Number: Supervisor‟s Name: ......................................................................................................... 1
Salomon v Salomon & Co Ltd case ................................................................................................ 4
Principles ..................................................................................................................................... 8
Relevant case laws .......................................................................................................................... 8
Importance of the case .................................................................................................................. 13
Why courts are willing to lift the veil of incorporation in certain situations ................................ 14
Conclusion .................................................................................................................................... 15
Salomon v Salomon 3
The law applicable on corporates of Malaysia is “The Companies Act 1965”. There is a different
law in different countries like in Malaysia there is “The Companies Act 1965”, in Australia “The
Corporation Act, 2001”
As per the relevant sections of the Companies Act, 1965, companies are considered as separate
or distinct legal entities that mean they will be entirely and exclusively liable and responsible
against the actions. The legal status of companies is different from that of shareholder.
Corporates are eligible to buy any kind of property in their own name. They can sue others if
they are at innocent side and can get sued for the misdeeds. Since companies are distinct and
have their own legal status they are given privilege to have common seal of their own which acts
as signature. Common seal is used to sign the accounts, papers, documents etc.
Corporate veil is just like a curtain. It is legal concept which separates the legal status of
corporation from the legal status of shareholders. This concept protects the shareholders or
owners, directors, employees from being personally liable for company‟s debt and obligations.
Corporate veil will be lifted when it assumed or 100 % sure to court that business was not
conducted in accordance with the provisions of corporate legislation.
Salomon v Salomon 4
Usually corporates have distinct or separate legal entities means corporates will be personally or
exclusively or solely responsible for the liabilities it incurs and will be the sole receiver of the
credit. Lifting of corporate veil is a process in which the real person behind the misdeed will be
liable for the defaults. It makes the person entirely responsible for the debts. The person who
engages himself into illegal or unlawful acts on behalf of the corporate will be accountable for
the losses company is going to suffer or is suffering due to his fault.
Salomon v Salomon & Co Ltd case
Mr.Aron Salomon was a successful merchant dealer dealing in leather, who was
specialized in manufacturing leather boots. He had a wife and family consisting of five
sons and a daughter. Four sons of Salomon are interested in working with him and forced
Salomon for an interest in their father business. Salomon ran his business as sole
proprietor for many years and acted as a sole trader of leather boots. In late 1892,
Salomon took a decision of incorporation of his sole proprietor business as a Limited
Liability Company because of the personal interest of his sons.
When Salomon Case came, the legal requisite for incorporation was minimum seven persons in
total should subscribe themselves as members. In Salomon Ltd., the shareholders were Mr.
Salomon, his daughter, wife, and four sons. Mr. Salomon got the place of managing director and
his sons became directors. 20,001 shares out of 20, 007 were owned by Mr. Salomon – the
emaining six were held equally by other six shareholders. Mr. Salomon sold his proprietorship
usiness to the new Limited Liability Corporation for almost £39,000 and £10,000 was a debt to
him. He was thus at the same time the company‟s principal creditor and principal shareholder.
Salomon v Salomon 5
His five children and wife were the subscribers to the memorandum. He himself with his 1 son
was the director of LLC. LLC acquired the business from Mr. Salomon at am extravagant price;
mode of payment was in shares rather than cash. Salomon invested £10,000 in the debentures of
LLC. The debts of the sole proprietor were paid out at the time of transfer from sole proprietor to
LLC, leaving £1,000 cash with Mr. Salomon. LLC fell in financial crisis; the position of
company became worse.
Finally the company went into liquidation, it is argued by liquidator on the grounds of fraud that
the debentures were invalid which were used by Mr. Salomon as security for the debt. The judge,
Vaughan Williams J at first instance held that to allow a man who ca
ies on business under
another name to set up a debenture in priority to the claims of the creditors of the company
would have the effect of defeating and delaying creditors. Vaughan Williams J. accepted this
argument, ruling that since Mr. Salomon had created the company solely to transfer his business
to it, the company was in reality his agent and he as principal was liable for debts to unsecured
creditors.
Lord Mac Naughten stated that:
“The company is at law a different person altogether from the subscribers of the Memorandum,
and although it may be that after incorporation the business is precisely the same as it was
efore, and the same persons are managers, and the same hands receive the profits, the company
in law is not the agent of the subscribers or the trustee for them. Nor are subscribers as members
liable, in any shape or form, except to the extent and the manner provided for in the Act.”
Salomon v Salomon 6
Salomon went to the court arguing that he has provided the loan to the company and company
and his legal status is separate so he will be considered first while payment at the time of
liquidation.
But The Court of Appeal ruled against Mr. Salomon that he had mistreated the privileges of
incorporation and limited liability, which the Administration had proposed only to discuss on
“independent bona fide shareholders, who had a mind and will of their own and were not mere
string-puppets”. The Court held that the LLC was Salomon agent and accordingly creditors of
LLC have right to sue Salomon personally.
Later Salomon pleased to the House of Lords, where his appeal was allowed. The decision of
House Of Lord was totally...