History of separate corporate personality
South Sea Bubble Joint Stock Companies Act 1844 Limited Liability Act 1855 Joint
Stock Companies Act 1856
Separation of legal personality of the company and that of the members. The company itself is
liable for its debts but once its assets are exhausted the creditors cannot go after the member’s
assets.
The need for company law: most laws are designed for application to humans.
Salomon v Salomon & Co (1897)
Whether Salomon can be held personally liable for the debentures (debts of the company).
Facts:
Mr. Salomon was a sole trader in leather business. He formed the company Salomon & Co Ltd.
His wife and 5 children held one share each in the company. Salomon was the managing
director, majority shareholder (20,001 shares) and secured creditor (10,000 pounds worth of
debentures). The newly incorporated company purchased the sole trading business for 39,000
pounds valued by Salomon. It was paid in 10,000 worth of debentures charging over all the
company’s assets, 20,000 pounds in 1 pound shares and 9,000 pounds in cash. Salomon’s
personal liability for debts changed from unlimited liability to limited liability as a shareholder
and as a secured creditor. If the company failed not only would Mr Salomon have no liability for
the debts of the company but whatever assets were left would be claimed by him in satisfaction
of his debt.
Salomon had to sell debentures due to trading difficulties. The debenture holder enforced the
security over the assets of the company and company was put under insolvent liquidation.
Heart of the case : Salomon’s exercise of control and ownership.
Held :
Mr Broderip (debenture holder) - company was a sham and a mere ‘alias’ or agent for Mr
Salomon.
CA - upheld this claim; motives of the promoters (Mr Salomon) and the members (Mr Salomon
and his family) of the company. Kay LJ - statutes were intended to allow seven or more persons,
bona fide associated for the purpose of trade, to limit their liability under certain conditions
and to become a corporation. But they were not intended to legalise a pretended association
for the purpose of enabling an individual to carry on his own business with limited liability in
the name of a joint stock company.
, Dignam : CA took a more moralistic approach. They think it amounts to a fraud in that they use
the words ‘defeated’, ‘defraud’, ‘pretended’, ‘mischief’, ‘perverting’, and ‘cheating’ to describe
Mr Salomon’s activities. They place the emphasis on what they see as the combined bad faith of
the nominee members and the overvaluation and are of the view that if Parliament had
intended one-person nominee companies it would have said so and not specified seven
members.
HL: company was validly formed according to the Companies Acts which only required that
there be seven members, holding one share each. There was nothing in the Act about bona
fides. The motives of the shareholders were irrelevant unless there was fraud involved. The
business thus belonged to the company and not to Salomon. Salomon was an agent of the
company, not the company his agent.
Lord Macnaghten: the company is at law a different person altogether from the subscribers …;
and, though it may be that after incorporation the business is precisely the same as it was
before, and the same persons are managers, and the same hands receive the profits, the
company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers,
as members liable, in any shape or form, except to the extent and in the manner provided by
the Act. Restricted itself to asking if the Act was complied with.
Neither the Court of Appeal nor the House of Lords could refer to the Parliamentary reports
(Hansard) to see what Parliament intended, as the courts were forbidden from doing this until
Pepper v Hart (1993). Had they been able to do so they would have found that in fact the seven
member requirement had been chosen to avoid its use by very small businesses.
Dignam: takes the view that it is simply to obey the will of Parliament, i.e. seven means seven.
Mr Salomon owned (both directly and through nominees) and controlled both businesses, yet
could attest limited liability of the company.
The Court of Appeal is partly attempting to work out what Parliament intended with its
seven member requirement while the House of Lords takes the view that it is simply to obey
the will of Parliament, i.e. seven means seven.
Lee v Lee’s Air Farming (1961)
Facts:
Mr. Lee set up a company, Lee’s Air Farming Limited. He was the majority shareholder (2,999
shares), sole governing director for life and employee (pilot). While he was working the
company plane he flied crashed and he was killed. The widow sought compensation as widow
of a ‘worker’ (Workers’ Compensation Act 1922).
Held (PC) :
the company and Mr Lee were distinct legal entities and therefore capable of entering into legal
relations with one another. They entered into a contractual relationship for him to be employed
as the chief pilot of the company. They found that he could in his role of governing director give
