Victorians set a lasting principle

Victorian London: the Salomon v Salomon Company Limited case during this period concluded that, as Mr Salomon was a distinct entity from his company, his directorship, and his shareholding, his rights as a secured creditor were recognised in priority to unsecured creditors

Victorian London: the Salomon v Salomon Company Limited case during this period concluded that, as Mr Salomon was a distinct entity from his company, his directorship, and his shareholding, his rights as a secured creditor were recognised in priority to unsecured creditors

Mon, Feb 25, 2013, 00:00

My favourite case: Brendan Cunningham, partner, McNulty Boylan Partners, Cork:Famous case enshrined in the law the fact that a company is ‘a person’ in the eyes of the law

What is your favourite case?

I remember studying Law in UCC, and initially finding the company law module less than riveting.

Our company law lecturer liked to liven up discussion by giving a presentation on historical cases with continuing significance. One of those was the case of Salomon v Salomon Company Limited which was reported as far back as 1897, and really was the case that got me interested in the principles of corporate law.

The principle from that case is basic and still stands the test of time. It confirmed that a company is a separate legal entity in its own right, and capable of being treated differently and separately than its members, shareholders, or indeed its directors.

Effectively, it enshrined in the law the fact that a company is “a person” in the eyes of the law.

Aaron Salomon was a leather merchant in Victorian England. He set up a company with the required seven shareholders (all members of his family).

He lent the company money and became a secured creditor by providing that the company would effectively mortgage its assets in his favour.

He then traded on and in the ordinary course of business, borrowed more money, and the company got into financial trouble.

The question of law was a simple one. Who should be paid first, the unsecured creditors (which included the company’s employees, creditors, the collector of rates, and utility suppliers,) or whether he, as a secured creditor of the company, should be paid first?

It is obvious from the judgment that the UK Court of Appeal initially felt that Salomon was a fraud, and that his company was a “sham”. But when the House of Lords dealt with the final appeal, it found that the company had been incorporated correctly, the security that it had provided to Mr Salomon had been correctly executed (and was given with the authority of the company), and there was no fraud.

It concluded that, as Mr Salomon was a distinct entity from his company, his directorship, and his shareholding, his rights as a secured creditor were recognised in priority to the unsecured creditors.

Why is this your favourite case?

Probably because it was the first one that started me thinking, and made me realise that the world of commerce and business is made up not just of the people that we deal with and interact with, but also the entities created by them.

The rule of Salomon has survived the test of time. It has been refined and exclusions have been identified, and enshrined in the various Companies Acts. But ultimately, the rule that a company is a separate entity, has survived, not just in the UK and Ireland, but all over the world.

Is the case still relevant?

I would say yes. In most recent times, there have been many advances made in the area of corporate responsibility, and much effort has gone into ensuring that companies are properly governed, to the extent that corporate governance has become a leading area of the law in its own right.

However the concentration has been, not on distinguishing from the Salomon rule (that a company is a separate legal entity and separate from its members), but instead on areas in which the corporate veil can be lifted, or in ensuring that companies are properly managed.

There are exceptions to the rule, where the corporate veil can be lifted, and where the directors/shareholders can be found to be personally liable.

These include fraud, misconduct, avoidance of a legal obligation, reckless trading and failure to keep proper books and records.

Other than the exceptions to the rule, a company has been confirmed, over the decades since Salomon, as a separate legal entity.

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