I had a rather interesting lecture last Thursday. The lecturer told us a few cases about the Doctrine of Corporate Legal Entity and Lifting of Corporate Veil. I had totally forgotten that we were having Business Law Class because the stories were too interesting.
I would like to share one of the cases about the Doctrine of Corporate Legal Entity, Salomon v. Salomon Co. Ltd.
Long time ago, old man Salomon was a leather boot and shoe manufacturer. He had a wife, a daughter and five sons. Four of the sons worked with him. As time went by, he turned the business into a limited company. The wife and five eldest children became subscribers and two eldest sons also directors. Mr. Salomon took 20,001 of the company’s 20,007 shares.
However, soon after Mr. Salomon incorporated his business, there was economic trouble. A series of strikes in the show industry led the government, Salomon’s main customer, to split its contracts between more firms. He and his wife lent the company lent the company money. He cancelled his debentures. But the company needed more money, and they sought £5000 from Mr. Edmund Broderip. They gave him a debenture, the loan with 10% interest and secured by a floating charge. But the business still failed. and they could not keep up with the interest payments. At the end, the company was put into liquidation. Mr. Broderip was paid but other unsecured creditors were not.
The liquidator met Broderip’s claim with a counter claim, joining Salomon as a defendant, that the debentures were invalid for being issued as a fraud. The liquidator claimed all the money back that was transferred when the company was started: rescission of the agreement for the business transfer itself, cancellation of the debentures and repayment of the balance of the purchase money.
The LIQUIDATOR asked Mr. Salomon to pay all the creditors since Mr. Salomon was the OWNER of the company. Salomon did not agree with that because he (Salomon) was supposed to pay for his DEBENTURES. But the Liquidator asked him to pay to other creditors.
TRIAL JUDGE VAUGHAN WILLIAMS agreed with Liquidator and asked SALOMON to pay on behalf of the company since Salomon was the owner, but Salomon didn't agree.
He appealed to COURT OF APPEAL so that he (Salomon) didn't have to pay the debts owed to creditors by the company. COURT OF APPEAL said that Salomon just found 6 people (his 5 children & wife) to form the company. Those 6 people are mere nominees of Mr. Salomon. COURT OF APPEAL also asked Mr. Salomon to pay.
This time Salomon appealed to the highest court "HOUSE OF LORDS".
HOUSE OF LORDS rejected all the judgments made by TRIAL JUDGE VAUGHAN WILLIAMS, COURT OF APPEAL.
HOUSE OF LORDS said that there is neither fraud in the manner which Mr. Salomon formed the company, nor Mr. Salomon formed the company for Fraudulent purpose.
So, Mr. Salomon did not have to pay to the company’s Creditors since Mr. Salomon and The Company are two Separate (Legal) Entities.The company is separate from its members.