Conceptualising Salomon Flashcards
Before Salomon
When Queen Victoria ascended the throne in 1837, there were two principal legal vehicles for the conduct of large scale
business ventures – the corporation and the joint stock company. A corporation existed either under a Royal Charter or by
virtue of an Act of Parliament and was recognised as having a separate legal existence. The joint stock company was in
law nothing more than a large partnership
How was the joint stock company first regulated
The courts employed the principles of partnership law. The members, as partners, owned the assets and were jointly and severally liable for the debts incurred by the business. Without a charter or act or parliament to transform it into a true corporation, the joint stock company could be nothing but a partnership
What was the issue with the joint stock company using partnership law
However, there were several problems which were exacerbated by the rapidly increasing use. Firstly, partnership law was used for genuine relationships between partners. Thus, the assumption reflected in the Partnership Act 1980 was of a venture undertaken actively by partners together. The typical joint stock company, however, had hundreds if not thousands of members.
Secondly, in relation to general private law. If a partnership was to be sued it was necessary to make all the partners party to a suit. While this worked for five or six people, discovering the identity of all members of a joint stock company was an insurmountable obsticle
What was introduced to solve this problem
The Companies Act 1844, there no longer needed the expense and delay of procuring a Charter or Act of Parliament. The Act conferred separate legal existence upon those groups which met the Act’s requirements.
Secondly, articulated the size needed for partnerships and companies.
However, these had little immediate effect.
Salomon at first instance
The case came before the High Court and judge Vaughn Williams. VW was clearly concerned that allowing an arrangement of this sort to be enforceable would have the effect of robbing the business’s creditors of the chance of recovering their money. Found that the relationship of principal and agent existed between Salomon and the company and the Aron should not be able to rely on the limited liability
Salomon court of appeal
Clearly the Court of Appeal considered what Aron had done was contrary to the spirit of the companies act and also there was something immoral about it.
Lindley suggested this was an attempt to use the Companies Act for a purpose which it was never intended and considered the corporation to be created for an illegitimate purpose.
His Lordship considered that the company had been ‘improperly created’ and that this was merely a sham intended to protect Aron from liability for the costs of his businesses. Thus they would not support this.
House of Lords decision in Salomon
The house of lords held that the logical result of the company acting as an agent was that the company was, itself, a person. When a company is itself a person, then the law should treat all of the assets and liabilities of the business as belonging to the company as a distinct legal person, as opposed to belonging to Salomon.
Hudson compares this to Dr Frankenstein conducting electricity through his monster, in terms of the idea that the House of Lords produced a form of life within which modern capitalism is born
As a result, the company was found to be a distinct legal person, and therefore the creditors could only recover their losses from the company and not from Salomon personally
Opinion of Grantham and Rickett
However, Grantham and Rickett suggest that this decision is often credited with establishing that a company incorporated under the Companies Act is in law a distinct legal entity. However, while their Lordships do reaffirm this point, their decision is hardly fons et origio of the distinct legal entity principle. The idea that a non-human entity could in law be treated as the subject of rights and duties had already been accepted into English legal history. It was a consequence intended by the legislative reforms of 1844, over 50 years earlier. It was due to the difficulties of dealing with groups of individuals that something else was required.
Opinion of Ireland
Ireland suggests there is another, more subtle point at which this line can be drawn. He suggests it is considering the differences in the wordings of the 1856 and 1862 Companies Acts.
Difference in wordings of the Acts
1856 Act stated that: Seven or more persons may form themselves into an incorporated company” clearly indicating that the people were the company; that it was made up of them. Perceived as such, the incorporated company could not be considered ‘completely separate’ from its members
Corresponding provision in 1862 Act: However, the corresponding provision in the 1862 Act omitted the words ‘themselves into’. A company was made by them but not of them. The 1856 Act clearly identified the company with its members, the 1863 Act suggested existence external to them. Seen as a thing made by but not of people, the incorporated company was depersonalised and thus completely separated from its members.
My opinion:
Thus when we look at it from the perspective of Ireland, Salomon seems must less spectacular, but simply a logical step taken from the 1862 Act. It seems to be, according to the phrases used by Roe, that this has followed path dependency, whereby this was a relatively predictable and incremental change to the law.
However, Hudson seems to suggest this was a punctuated equilibrium, whereby the law has decided to do something completely new.
This is perhaps supported by the case of Smith v Anderson in 1880 where, notwithstanding the Companies Act 1844, the company remained a species of trust. This idea of trusts was also suggested by Kay LJ at second instance and by Lindley LJ.
Punctuated Equilibrium?
One might argue this was a punctuated equilibrium for a few reasons.
Firstly, looking at Salomon itself, Lord Halsbury suggests that “it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person”, yet he fails to cite any cases in support of this assertion. Therefore, this indicates it might be revolutionary as there are not cases for him to cite.
Furthermore, this might be seen as not the usual way for the Companies Act to have been used, but an innovative decision. Although the Court of Appeal were particularly damming of the way that Salomon had used this, they called this an ‘ingenious scheme’’. Thus, if we take this position, this shows an innovative way to use the law.
Furthermore, as according to Kahn-Freund, there was a need in the 19th century for the privileges of incorporation and limited liability as they enabled a number of capitalists to embark upon risky adventures without the burden of personal liability. Thus, this decision might be considered revolutionary in relation to the needs of the Victorian Empire for capital investment.
Path dependency
The opinions of Ireland and Grantham and Rickett when considering the law of the time
Furthermore, in the “invisible merchant” from Sandy’s Case, 1684
Cases for asserting Salomon
Macaura v Northern Assurance
Lee v Lee Air Farming
Adams v Cape Industries plc
Macaura (facts)
- Macuara was the owner of the Killymoon estate in Tyrone.
- He sold the whole of the timber on the estate to Irish Canadian Sawmills Ltd in consideration of the allotment to him of 42,000 fully paid £1 shares.
- Macuara and nominees owned all the shares in the company
- Macuara was also an unsecured creditor of the company for an amount of £19,000.
- Following the sale of the timber, Macaura took out insurance policies in his own name with the respondent insurance company and others covering the timber against fire.
- Two weeks later, the timber was destroyed in a fire.
- A claim brought by Macuara on the policies was dismissed on the ground he had no insurable interest.
Decision in Macaura
- Macuara had no insurable interest in the timber, it was not his.
- Timber belonged to Irish Canadian Sawmills Ltd, it simply lay on his land by his permission
- He had no responsibility to its owner for its safety
- He owned almost all the shares in the company, and the company owed him a good deal of money, but neither as creditor nor shareholder could he insure the company’s asset
- He stood in no legal or equitable relation to the timber at all
- His relation was to the company not the goods
