Salomon v. Salomon & Co., Ltd.(1897) AC 22 (HL)

Case Summary

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The appellant, Aron Salomon, had for some thirty years prior to 1892 carried on business
as a leather merchant and hide factor and wholesale and export boot manufacturer under the
style of A. Salomon & Co. A limited company was formed in 1892 to carry on the business,
the subscribers to the memorandum of association being the appellant, his wife and daughter,
and his four sons. The nominal capital of the company was £40,000, divided into £1 shares;
20,007 shares were issued, of which the appellant held 20,001, the other signatories of the
memorandum of association holding one share each. The appellant’s business was sold to the
company for £38,782, of which £16,000 was to be paid in cash or debentures, and at the first
meeting of the directors, who consisted of the appellant and two of his sons, it was resolved to
pay the appellant £6,000 in cash and £10,000 in debentures. These debentures were
afterwards mortgaged by the appellant to one Edmund Broderip as a security for an advance
of £5,000, but eventually they were cancelled, and £10,000 fresh debentures were issued to
Edmund Broderip. In October, 1893, an order was made for the winding-up of the company,
at which date the company was indebted to unsecured creditors other than Aron Salomon to
the amount of £7,773. An action was brought by the liquidator of the company against the
appellant, which was tried before VAUGHAN WILLIAMS, J., who declared that the company
were entitled to be indemnified by the appellant to the amount of £7,733. This decision was
affirmed by the Court of Appeal.
LORD HALSBURY, L.C. – The important question in this case – is whether the
respondent company was a company at all-whether, in truth, that artificial creation of the
legislature had been validly constituted in this instance; and, in order to determine that
question, it is necessary to look at what the statute itself has determined in that respect. I have
no right to add to the requirements of the statute, nor to take from the requirements thus
enacted. The sole guide must be the statute itself.
That there were seven actual living persons who held shares in the company has not been
doubted [Companies Act, 1948 s. 1, which provides for the formation of a company by seven
persons]. As to the proportionate amounts held by each I will deal with them presently; but it
is important to observe that this first condition of the statute is satisfied, and it follows as a
consequence that it would not be competent to anyone, and certainly not to these persons
themselves, to deny that they were shareholders. I must pause here to point out that the statute
enacts nothing as to the extent or degree of interest/which may be held by each of the seven,
or as to the proportion of interest or influence possessed by one or the majority of the
shareholders over the others. One share is enough. Still less is it possible to contend that the
motive of becoming shareholders, or of making them shareholders, is a field of inquiry which

the statute itself recognises as legitimate. If they are shareholders they are shareholders for all
purposes, and, even if the statute was silent as to the recognition of trusts, I should be
prepared to hold that if six of them were the cestuis que trust of the seventh, whatever might
be their rights inter se, the statute would have made them shareholders to all intents and
purposes with their respective rights and liabilities.
Dealing with them in their relation to the company, the only relation which I believe the
law would sanction would be that they were corporators of the corporate body. I am simply
here dealing with the provisions of the statute, and it seems to me to be essential to the
artificial creation that the law should recognise only that artificial existence, quite apart from
the motives or conduct of individual corporators. In saying this I do not at all mean to suggest
that if it could be established that this provision of the statute to which I am adverting had not
been complied with, you could not go behind the certificate of incorporation to show that a
fraud had been committed upon the officer entrusted with the duty of giving the certificate,
and that by some proceeding in the nature scire facias you could not prove the fact that the
company had no legal existence. But, short of such proof, it seems to me impossible to
dispute that once the company is legally incorporated it must be treated like any other
independent person with rights and liabilities appropriate to itself, and that the motives of
those who took part in the promotion of the company are absolutely irrelevant in discussing
what those rights and liabilities are.
I will, for the sake of argument, assume the proposition that the Court of Appeal lays
down, that the formation of the company was a mere scheme to enable Salomon to carry on
business in the name of the company. I am wholly unable to follow the proposition that this
was contrary to the true intent and meaning of the Companies Act. I can only find the true
intent and meaning of the Act from the Act itself, and the Act appears to me to give a
company a legal existence with, as I have said, rights and liabilities of its own, whatever may
have been the ideas or schemes of those who brought it into existence. I observe that
VAUGHAN WILLIAMS, J., held that the business was Salomon’s business and no one else’s,
and that he chose to employ as agent a limited company, and he proceeded to argue that he
was employing that limited company as agent, and that he was bound to indemnify that agent the company. I confess it seems to me that that very learned judge becomes involved by this
argument in a very singular contradiction. Either the limited company was a legal entity or it
was not. If it was, the business belonged to it and not to Salomon; if it was not, there was no
person and nothing to be an agent at all; and it is impossible to say at the same time that there
is a company and there is not. LINDLEY, L.J., on the other hand, affirms that there were seven
members of the company, but, he says, it is manifest that six of them were members simply in
order to enable the seventh himself to carry on business with limited liability, so that the
object of the whole arrangement was to do the very thing which the legislature intended not to
be done.
It is obvious to inquire where is that intention of the legislature manifested in the statute?
Even if we were at liberty to insert words to manifest that intention, I should have great
difficulty in ascertaining what the exact intention thus imputed to the legislature is or was. In
this particular case it is the members of one family that represent all the shares; but if the
supposed intention is not limited to so narrow a proposition as this, that the seven members

must not be members of one family, to what extent may influence or authority or intentional
purchase of a majority among the shareholders be carried so as to bring it within the supposed
prohibition? It is, of course, easy to say that it was contrary to the intention of the legislature-a
proposition which, by reason of its generality, it is difficult to bring to the test; but when one
seeks to put as an affirmative proposition what the thing is which the legislature has
prohibited, there is, as it appears to me, an insuperable difficulty in the way of those who seek
to insert by construction such a prohibition into the statute.
As one mode of testing the proposition it would be pertinent to ask whether two or three,
or, indeed, all seven, may constitute the whole of the shareholders. Whether they must be all
independent of each other in the sense of each having an independent beneficial interest – and
this is a question that cannot be answered by the reply that it is a matter of degree. If the
legislature intended to prohibit something, you ought to know what that something is. All it
has said is that one share is sufficient to constitute a shareholder, though the shares may be
100,000 in number. Where am I to get from the statute itself a limitation of that provision that
that shareholder must be an independent and beneficially interested person? I find all through
the judgment of the Court of Appeal a repetition of the same proposition to which I have
already adverted – that the business was the business of Aron Salomon, and that the company
is variously described as a myth and a fiction.
LORD WATSON –The appellant, Aron Salomon, for many years carried on business, on
his own account, as a leather merchant and wholesale boot manufacturer. With the design of
transferring his business to a joint-stock company, which was to consist exclusively of
himself and members of his own family, he, on July 20, 1892, entered into a preliminary
agreement with one Adolph Anholt, as trustee for the future company, settling the terms upon
which the transfer was to be made by him, one of its conditions being that, in part payment,
he was to receive £10,000 in debentures of the company. A memorandum of association was
then executed by the appellant, his wife, a daughter, and four sons, each of them subscribing
for one share, in which the leading object for which the company was formed was stated to be
the adoption and carrying into effect, with such modifications (if any) as might be agreed on,
of the provisional agreement of July 20. The memorandum was registered on July 28, 1892,
and the effect of registration, if otherwise valid, was to incorporate the company, under the
name of “Aron Salomon & Co.,Ltd.”, with liability limited by shares, and having a nominal
capital of £ 40,000 divided into 40,000 shares of £1 each.
The company adopted the agreement of July 20, subject to certain modifications which
are not material; and an agreement to that effect was executed between them and the appellant
on Aug. 2, 1982. Within a month or two after that date the whole stipulations of the
agreement were fulfilled by both parties. In terms thereof, 100 debentures, for £100 each,
were issued to the appellant, who, upon the security of theses documents, obtained an advance
of £5,000 from Edmund Broderip. In February, 1893, the original debentures were returned
to the company and cancelled, and in lieu thereof, with the consent of the appellant as
beneficial owner, fresh debentures to the same amount were issued to Mr. Broderip, in order
to secure the repayment of his loan, with interest at 8 per cent. In September, 1892, the
appellant applied for and obtained an allotment of 20,000 shares; and from that date until an

order was made for its compulsory liquidation, the share register of the company remained
unaltered, 20,001 shares being held by the appellant and six shares by his wife and family. It
was all along the intention of these persons to retain the business in their own hands, and not
to permit any outsider to acquire an interest in it.
Default having been made in the payment of interest upon his debentures, Mr. Broderip,
in September, 1893, instituted an action in order to enforce his security against the assets of
the company. Thereafter a liquidation order was made and a liquidator appointed, at the
instance of unsecured creditors of the company. It has now been ascertained that, if the
amount realised from the assets of the company were, in the first place, applied in extinction
of Mr. Broderip’s debt and interest, there would remain a balance of about £1,055, which is
claimed by the applicant as beneficial owner of the debentures. In the event of his claim
being sustained there will be no funds left for payment of the unsecured creditors, whose
debts amount to £ 7,333 8s. 6d. The liquidator lodged a defence in the name of the company,
to the debenture suit, in which he counterclaimed against the appellant (i) to have the
agreements of July 20 and Aug. 2, 1892, rescinded, (ii) to have the debentures already
mentioned delivered up and cancelled, (iii) repayment of all sums paid by the company to the
appellant under these agreements, and (iv) a lien for these sums upon the business and assets.
The averments made in support of these claims were to the effect that the price paid by the
company exceeded the real value of the business and assets by upwards of £8,200; that the
arrangements made by the appellant for the formation of the company were a fraud upon the
creditors of the company; that no board of directors of the company was ever appointed, and
that in any case such board consisted entirely of the appellant, and there never was an
independent board.
The case went to proof before VAUGAN WILLIAMS, J., when the liquidator was
examined as a witness on behalf of the company, while evidence was given for the appellant
by himself and by his son, Emanuel Salomon, one of the members of the company, who had
been employed in the business for nearly twenty years. The evidence shows that before its
transfer to the new company the business had been prosperous, and had yielded to the
appellant annual profits sufficient to maintain himself and family and to add to his capital. It
also shows that, at the date of the transfer, the business was perfectly solvent. The liquidator,
whose testimony was chiefly directed toward proving that the price paid by the company was
excessive, admitted in cross-examination that the business when transferred to the company
was in a sound condition, and that there was a substantial surplus. No evidence was led
tending to support the allegation that no board of directors was ever appointed, or that the
board consisted entirely of the appellant. The non-success and ultimate insolvency of the
business, after it came into the hands of the company, was attributed by the witness Emanuel
Salomon to a succession of strikes in the boot trade, and there is not a tittle of evidence
tending to modify or contradict his statement. I think it also appears from the evidence that all
the members of the company were fully cognisant of the terms of the agreements of July 20
and Aug. 2, 1892, and that they were willing to accept and did accept those terms. The case

was heard before the learned judge who, at the close of the argument, announced that he was
not prepared to grant the relief craved by the company. He at the same time suggested that a

different remedy might be open to the company, and, on the motion of their counsel, he
allowed the counterclaim to be amended.
In conformity with the suggestion thus made by the Bench, a new and alternative claim
was added for (i) a declaration that the appellant is liable to indemnify the company against
the whole of their unsecured debts, (ii) judgment against him for £ 7,733 8s. 3d., being the
amount of these debts, and (iii) a lien for that amount upon all sums which might be payable
to the appellant by the company, in respect of his debentures or otherwise, until the judgment
was satisfied. There were also added averments to the effect that the company was formed by
the appellant and that the debentures for £ 10,000 were issued in order that he might carry on
the business and take all the profits without risk to himself, and also that the company was the
“mere nominee and agent” of the appellant. The allegations of the company, in so far as they
have any relation to the amended claim, their pith consisting in the averments made on
amendment, were meant to convey a charge of fraud.
On re-hearing the case VAUGHAN WILLIAMS, J., without disposing of the original
claim, gave the company decree of indemnity in terms of their amended claim. I do not
profess my ability to follow accurately the whole chain of reasoning by which the learned
judge arrived at that conclusion, but he appears to have proceeded mainly upon the ground
that the appellant was in truth the company, the other members being either his trustees or
mere “dummies”, and, consequently, that the appellant carried on what was truly his own
business under cover of the name of the company, which was nothing more than an alias for
Aron Salomon. On appeal from his decision the Court of Appeal made an order finding it
unnecessary to deal with the original claim, and dismissing the appeal in so far as it related to
the amended claim. The ratio upon which that affirmance proceeded, as embodied in the
order, was: “This court, being of opinion that the formation of the company, the agreement of
August, 1892, and the issue of debentures to Aron Salomon pursuant to such agreement, were
a mere scheme to enable him to carry on business in the name of the company, with limited
liability, contrary to the intent and meaning of the Companies Act, 1862, and, further, to
enable him to obtain a preference over other creditors of the company by procuring a first
charge on the assets of the company by means of such debentures…”
The opinion delivered by the lords justices are strictly in keeping with the reasons
assigned in their order. LINDLEY, L.J., after observing “that the incorporation of the
company cannot be disputed”, refers to the scheme of the formation of the company, and says,
“the object of the whole arrangement is to do the very thing which the legislature intended not
to be done”, and he adds that “Mr. Salomon’s scheme is a device to defraud creditors.”
Assuming that the company was well incorporated in terms of the Act of 1862, an assumption
upon which the decisions appealed from appear to me to throw considerable doubt, I think it
expedient before considering the amended claim, to deal with the original claim for
rescission, which was strongly pressed upon us by counsel for the company, under their cross appeal. Upon that branch of the case there does not appear to me to be much room for doubt.
With the exception that the word “exorbitant” appears to me to be too strong an epithet I
entirely agree with VAUGHAN WILLIAMS, J., when he says:
“I do not think that when you have a private company, and all the shareholders in the
company are perfectly cognisant of the conditions under which the company is

formed, and the conditions of the purchase by the company, you can possibly say that
purchasing at an exorbitant price (and I have no doubt whatever that the purchase
here was at an exorbitant price) is a fraud upon those shareholders or upon the
company.”
The learned judge goes on to say that the circumstances might have amounted to fraud if
there had been an intention on the part of the original shareholders “to allot further shares at a
later period to future allottees.” Upon that point I do not find it necessary to express any
opinion, because it is not raised by the facts of the case, in my view, these considerations are
of no relevancy in a question as to rescission between the company and the appellant.
Counsel for the company argued that the agreement of Aug. 2 ought to be set aside, upon
the principle followed by this House in Erlanger v. New Sombrero Phosphate Co. [(1874-
80) All ER Rep. 271]. In that case the vendor, who got up the company, with the view of
selling his adventure to it, attracted shareholders by a prospectus which was essentially false.
The directors, who were virtually his nominees, purchased from him without being aware of
the real facts; and on their assurance that, in so far as they knew, all was right the shareholders
sanctioned the transaction. The fraud by which the company and its shareholders had been
misled was directly traceable to the vendor; and the transaction was set aside at the instance of
the liquidator, the Lord Chancellor (EARL CAIRNS) expressing a doubt whether, even in those
circumstances, the remedy was not too late, after a liquidation order. But in the present case
the agreement of July 20 was, in the full knowledge of the facts, approved and adopted by the
company itself, if there was a company, and by all the shareholders who ever were or were
likely to be members of the company. In my opinion, therefore, Erlanger v. New Sombrero
Phosphate Co. has no application, and the original claim of the liquidator is not maintainable.