(1897) 1 Ac 22

22 HOUSE OF LORDS [1897}
H. L . (E.) b y a n a c t i o n f or t h e p u r p o s e , b u t h a d n o r i g h t v i r t u t e officii t o
1896 h a v e a n y p a r t o f t h e N e w Z e a l a n d m o r t g a g e s a p p r o p r i a t e d
LORD * t h e e s t a t e of t h e i r t e s t a t r i x i n s p e c i e .
Order appealed from affirmed and' appeal
S t IDE L E Y
V.
ATTORNEY-
GENERAL, dismissed with costs.
Lords' Journals, November 13, 1896.
Solicitor for appellants : J. A. Bertram.
Solicitor for respondent : Solicitor of Inland Revenue.
[HOUSE OF LORDS.]
H . L . ( E . ) AEON SALOMON ( PAUPEE) APPE L L ANT;
1896 AND
Nov
-
16
- A. SALOMON AND COMPANY, L IMITE D EESPONDENTS.
BY ORIGINAL APPEAL.
AND
A. SALOMON AND COMPANY, L IMITE D APPELLANTS ;
AND
AEON SALOMON , RESPONDENT.
BY CROSS APPEAL.
CompanyPrivate Company One Man CompanyLimited Liability Wind-
ing-upFraud upon Creditors Liability to indemnify Company in
respect! of DebtsRescissionCompanies Act 1862 (25 & 26 Vict. c. 89)
ss. 6, 8, 30, 43. .
It is not contrary to the true intent and meaning of the Companies Act
1862 for a trader, in order to limit his liability and obtain ,the preference
of a debenture-holder over other creditors, to sell his business to a limited
company consisting only of himself and six members of his own family,
t he business being then solvent, all the terms of sale being' known to and
approved by the shareholders, and all t he requirements of the Act being
complied with.
A trader sold a solvent business to a limited company with a nomina
capital of 40,000 shares of 12. each, the company consisting only of t h e
vendor, his wife, a daughter and four sons, who subscribed for one share
each, all t he terms of sale being known to and approved by t he shareholders.
AC. AND PRIVY COUNCIL.
23
In part payment of t he purchase-money debentures forming a floating
security were issued to t he vendor. Twenty thousand shares were also
issued to him and were paid for out of the purchase-money. These shares
gave the vendor t he power of outvoting the six other shareholders. No
shares other than these 20,007 were ever issued. All t he requirements of
t he Companies Act 1862 were complied wi t h. The vendor was appointed
managing director, bad times came, the company was wound up, and after
satisfying t he debentures there was not enough to pay t he ordinary
creditors:
Held, t ha t t he proceedings were not contrary to t he true i nt ent and
meaning of t he Companies Act 1862 ; t hat the company was duly formed
and registered and was not t he mere "a l i a s " or agent of or trustee for t he
vendor; t hat he was not liable to indemnify t he company against t he
creditors' claims; t hat there was no fraud upon creditors or shareholders;
and t hat the company (or the liquidator suing in the name of t he company)
was not entitled to rescission of t he contract for purchase.
The decisions of Vaughan Williams J. and the Court of Appeal ([1895]
2 Ch. 323) reversed.
H. L. (E.)
1896
SALOMON
i i .
SALOMON
&Co.
S AL O MO N
&CO .
v.
SALOMON.
TH E following statement of t he facts material to t hi s report
is taken from t he judgment of Lor d Wat son :
The appellant, Aron Salomon, for many years carried on
business, on his own account, as a leather merchant and whole-
sale boot manufacturer. Wi t h t he design of transferring his
business to a joint stock company, which was to consist exclu-
sively of himself and members of his own family, he, on
Jul y 20, 1892, entered into a preliminary agreement with one
Adolph Anholt, as trustee for t he future company, settling t he
terms upon which t he transfer was to be made by him, one
of its conditions being t ha t par t payment mi ght be made
to him in debentures of t he company. A memorandum of
association was t hen executed by t he appellant, his wife, a
daughter, and four sons, each of them subscribing for one share,
in which t h e leading object for which t he company was formed
was stated to be t he adoption and carrying into effect, with
such modifications (if any) as mi ght be agreed on, of t h e pr o-
visional agreement of Jul y 20. The memorandum was regis-
tered on Jul y 28, 1892; and t h e effect of registration, if
otherwise valid, was to incorporate t he company, under t he
name of " Aron Salomon and Company, Li mi t ed, " wi t h liability
limited by shares, and having a nominal capital of 40,000?.,
divided i nt o 40,000 shares of 11. each. The company adopted
24
HOUSE OF LORDS [1897]
H. L. (E.)
189G
SALOMON
v.
SALOMON
&Co.
SALOMON
& Co.
' v.
SALOMON.
t he agreement of Jul y 20, subject to certain modifications which
are not ma t e r i a l ; and an agreement to t hat effect was executed
between them and t he appellant on August 2, 1892. Wi t hi n a
month or two after t hat date the whole stipulations of t he
agreement were fulfilled by both parties. In terms thereof,
100 debentures, for 1001. each, were issued to t he appellant,
who, upon t he security of these documents, obtained an advance
of 5000Z. from Edmund Broderip. In February 1893 t he
original debentures were returned to t he company and can-
celled ; and in lieu thereof, with the consent of t he appellant
as beneficial owner, fresh debentures to t he same amount were
issued to Mr. Broderip, in order to secure t he repayment of his
loan, with interest at 8 per cent.
In September 1892 t he appellant applied for and obtained an
allotment of 20,000 s har es ; and from t hat date until an order
was made for its compulsory liquidation, t he share register of
t he company remained unaltered, 20,001 shares being held by
t he appellant, and six shares by his wife and family. It was
all along t he intention of these persons to retain t he business
in their own hands, and not to permit any outsider to acquire
an interest in i t .
Default having been made in t he payment of interest upon
his debentures, Mr. Broderip, in September 1893, instituted an
action in order to enforce his security against t h e assets of t he
company. Thereafter a liquidation order was made, and a
liquidator appointed, at t he instance of unsecured creditors of
t he company. It has now been ascertained t hat , if t he amount
realised from t he assets of t he company were, in t he first place,
applied in extinction of Mr. Broderip's debt and interest, there
would remain a balance of about 1055?., which is claimed by
t he appellant as beneficial owner of t he debentures. In t he
event of his claim being sustained there will be no funds left
for payment of t he unsecured creditors, whose debts amount to
7733Z. 8s. U.
The Liquidator lodged a defence, in name of t he company, to
t he debenture suit, in which he counter-claimed against t he
appellant (who was made a party to t he counter-claim), (1.) to
have t he agreements of Jul y 20 and August 2, 1892 rescinded,
A.C. AND PRIVY COUNCIL.
25
(2.) to have t he debentures already mentioned delivered up and
cancelled, (3.) judgment against t he appellant for all sums paid
by t he company to t he appellant under these agreements, and
(4.) a lien for these sums upon t he business and assets. The
averments made in support of these claims were to t he effect
t ha t t he price paid by t he company exceeded t h e real value of
t he business and assets by upwards of 8200Z.; t hat the arrange-
ments made by t he appellant for t h e formation of the company
were a fraud upon t he creditors of t he company; t hat no board
of directors of t he company was ever appointed, and t hat in
any case such board consisted entirely of t h e appellant, and
there never was an independent board. The action came on
for trial on t he counter-claim. before Vaughan Williams J. ,
when t he liquidator was examined as a witness on behalf of t he
company, whilst evidence was given for t he appellant by him-
self, and by his son, Emanuel Salomon, one of t he members of
t he company, who had been employed in t he business for
nearly twenty years.
The evidence shews t hat , before its transfer to t he new
company, t he business had been prosperous, and had yielded to
the appellant annual profits sufficient to maintain himself and his
family, and to add to his capital. It also shews t hat at t he date
of transfer t he business was perfectly solvent. The liquidator,
whose testimony was chiefly directed toward proving t hat t he
price paid by t he company was excessive, admitted on cross-
examination t hat t he business, when transferred to t he company,
was in a sound condition, and t h a t t here was a substantial
surplus. No evidence was led tending to support t he allegation
t ha t no board of directors was ever appointed, or t ha t t he board
consisted entirely of t he appellant. The non-success and
ultimate insolvency of t he business, after it came into t he
hands of t he company, was attributed by t h e witness Emanuel
Salomon to a succession of strikes in t he boot trade, and there
is not a t i t t l e of evidence tending to modify or contradict his
statement. It also appears from t he evidence t ha t all t he
members of t he company were fully cognisant of t he terms
of t he agreements of Jul y 20 and August 2,1892, and t ha t they
were willing to accept and did accept these t erms.
H. L. (E.)
189G
S A L O M O N
V.
SALOMON
&Co.
SALOMON
&Co.
v.
S A LO M O N .
26
H. X. (E.),
1896
SALOMON.
' v.'
SALOMON.
&Co.
SALOMON
&'Oo.
v.
SALOMON.
; At t he qlqse of t he argument Vaughan Williams J. announced
t ha t he was not prepared to grant t he relief craved by t he
company. He at t he same time suggested t hat a different
remedy might be open to t he company; and, on t he motion of
their counsel, he allowed t he counter-claim to be amended. In
conformity with t he suggestion thus made by t he Bench, a new
and alternative claim was added for a declaration t ha t t h e
company or. t h e liquidator was entitled (1.) to be indemnified by
t he appellant against t he whole of t he company's unsecured
debts, namely, 7733Z. 8s. 3d.; (2.) to judgment against t he appel-
lant for t hat s u m; and (3.) to a lien for t hat amount upon all
sums which might be payable to t he appellant by t h e company
in respect of his debentures or otherwise until t he judgment was
satisfied. There were also added averments to t he effect t ha t
t he company was formed by t he appellant, and t ha t t he
debentures for 10,000?. were issued in order t h a t he might carry
on t he business, and take all t he profits without risk to himself;
and also t ha t t he company was t he " mere nominee and a g e n t "
of t he appellant.
,.,,Vaughan Williams J. made an order for a declaration in t he
terms of t he new and alternative counter-claim above stated,
without making any order on t he original counter-claim.
,,,Both parties having appealed, t he Court of Appeal (Lindley,
L^pes and Kay L . J J.) being of opinion t ha t t he formation of
tjhe company, t he agreement of August 1892, and t he issue of
debentures to t he appellant pursuant to such agreement, were a
mere scheme to enable him to carry on business in t he name of
t he company wi t h limited liability contrary to t he t r ue i nt ent
and meaning of t he Companies Act 1862, and further to enable
him to obtain a preference over other creditors of t he company
by procuring a first charge on t he assets of t he company by
means of such debentures, dismissed t he appeal with costs, and
declined to make any order on t he original counter-claim. (1)
Against this order t he appellant appealed, and t he company
brought a cross-appeal against so much of it as declined to
make any order upon t he original counter-claim. Broderip
having been paid off was no party to this appeal or cross-appeal.
(1) Reported as Broderip v. Salomon, [1895] 2 Ch. 323.
A. C. AND PRIVY COUNCIL.
27
Ju n e 15, 22, 29. "Cohen Q.C. and Buckley Q.C. (McCall Q.C.
and Muir Mackenzie with t hem), for t he appellant in t he
original appeal. The view of Vaughan Williams J. t hat t he
company was t h e mere alias or agent of t he appellant so as to
make hi m liable to indemnify t he company against creditors,
was not adopted by t he Court of Appeal, who seem to have
considered t he company as t he appellant's trustee. There is
no evidence in favour of either view. The sale of t he business
was bona fide: t he business was genuine and solvent, with a
substantial surplus. All t he circumstances were known to and
approved by t he shareholders. All t he requirements of t he
Companies Act, 1862, were strictly complied wi t h : t he purpose
was lawful, t he proceedings were regular. How could t he
registrar refuse to register such a company ? Wh a t objection
is it t hat t he vendor desires to convert his unlimited into a
limited liability ? That is t he prime object of t urni ng a private
business into a limited company, practised every day by banks
and other great firms. And what difference to creditors could
it make whether t he debentures were held by t he vendor or
by st r anger s? Whoever held them had t he preference over
creditorsthat is t he future creditorsall t he old creditors
having been paid off by t he vendor. There was no misrepre-
sentation of fact, and no one was mi sl ed: where is "t h e fraud
upon cr edi t or s " spoken of in t he Court of Appeal? The
creditors were under no obligation to t r ust t he company; they
might, if they had desired, have found out who held t he shares,
and in what proportion, and who held t he debentures. There
is not a word in ss. 6, 8, 30, 43, or any other section of t he
Companies Act, 1862, forbidding or even pointing against such
a company so formed and for such objects. Then, if. t he
company was a real company, fulfilling all t he requirements of
t he Legislature, it must be treated as a company, as an entity,
consisting indeed of certain corporators, but a distinct and
independent corporation. The Court of Appeal seem to treat
the company sometimes as substantial and sometimes as
shadowy and unr e a l : it must be one or t he other, it cannot be
both. A Court cannot impose conditions not imposed by, the
Legislature, and say t ha t t he shareholders must not be related
H. L. (E.)
1890
SALOMON
.
SALOMON
&Co.
SALOMON
&Co.
v.
SALOMON.
28
H. L. (E.) to each other, or t hat they must hold more t han one share
1896
S A LO M O N
v.
SALOMON
& C O .
SALOMON
&Co.
v.
SALOMON.
each. There is nothing to prevent one shareholder or all the
shareholders holding t he shares in t rust for some one person.
Wh a t is prohibited is the entry of a t rust on t he register : s. 30.
If all the shares were held in t r ust t hat would not make t he
company a trustee. The authorities relied upon below (which
all t ur n upon some one being deceived or defrauded) do not
touch t he present case and do not support t he judgment below.
[They referred to Beg. v. Arnaud (1); In re Ambrose Lake
Tin and Copper Mining Co. (2); In re British Seamless Paper
Box Co. (3); Farrar v. Farrars, Limited (4); North-West
Transportation Co. v.'Beatty (5); In re National Debenture and
Assets Corporation (6); In re George Newman dt Co. (7) ]
As to t he cross-appeal, there being no fraud, misrepresenta-
tion or deceit, not even any failure of consideration, there is no
ground for rescission. Moreover, t he company's assets having
been sold t he company is not in a position to ask for it.
Farwell Q.C. and H. S. Theobald, for the respondents.
The question is one of fact rat her t han law, and t he t r ue
inferences from t he facts are t he s e : The appellant incorporated
t he company to carry on his business without risk to himself
and at his creditors' expense. The business was decaying
when t he company was formed, and though carried on as
before, nay with more (borrowed) money, it failed very soon
after t he sale. To get an advantage over creditors t he vendor
took debentures and concealed t he fact from t hem. The
purchase-money was exorbitant, t he price dictated solely by
t he vendor, and there was no independent person acting for t he
company. Though incorporated under the Acts t he company
never had an independent existence: it was in fact t he
appellant under another n a me ; he was t he managing director,
t he other directors being his sons and under his control. The
shareholders other t han himself were his own family, and his
vast preponderance of shares made him absolute master.
(1) (1846) 9 Q. B. 806. (4) (1888) 40 Ch. D. 395.
(2) (1880) 14 Ch. D. 390, 394, 398. (5) (1887) 12 App. Cas. 589.
(3) (1881) 17 Ch. D. 467,476, 479. (6) [1891] 2 Ch. 505.
(7) [1895] 1 Ch. 674, 685.
A.C. AND PRIVY COUNCIL.
29
He could pass any resolution, and he would receive all the
profitsif any. Whet her therefore t he company is considered
as his agent, or his nominee or his trustee, mat t ers little. The
business was solely his, conducted solely for him and by him,
and t he company was a mere sham and fraud, in effect entirely
contrary to t he i nt ent and meaning of t he Companies Act. The
liquidator is therefore entitled to counter-claim against him for
an indemnity. As to t he cross-appeal and t he claim for rescis-
sion t he decision in Erlanger v. New Sombrero Phosphate Co. (1)
and t he observations of Lord Cairns are precisely applicable
and conclusive in favour of rescission. See also Adam v. New-
bigging. (2)
[ LORD WATSON referred t o Western Bank of Scotland v.
Addie (3), following Clarke v. Dickson. (4) ]
[They also referred to Ex parte Cowen (5) ; In re
Smith. (6)]
H. L. ( E. )
1896
SALOMON
v.
SALOMON
& Co.
SALOMON-
S -CO .
v.
SALOMON.
The House took time for consideration.
Nov. 16. LORD HALSBURY L. C. My Lords, t he important
question in t hi s case, I am not certain it is not t he only
question, is whether t he respondent company was a company
at allwhether in t r u t h t hat artificial creation of t he Legisla-
t ure had been validly constituted in t hi s i ns t ance; and in order
to determine t h a t question it is necessary to look at what t he
st at ut e itself has determined in t h a t respect. I have no right
to add to t he requirements of the st at ut e, nor to take from t he
requirements t hus enacted. The sole guide must be t he
st at ut e itself.
Now, t ha t there were seven actual living persons who held
shares in the company has not been doubted. As to t he pro-
portionate amounts held by each I will deal present l y; but it
is i mport ant to observe t ha t this first condition of t he st at ut e
is satisfied, and it follows as a consequence t ha t it would not
(1) (1878) 3 App. Cas. 1218, 1236, (3) (1867) L. R. 1 H. L., Sc. 145.
1238. (4) (1858) E. B. & E. 148.
(2) (1888) 13 App. Cas. 308. (5) (1867) L. R. 2 Ch. 563.
(6) (1890) 25 Q. B. D . 536, 541.
30 HOUSE OF LORDS [1897
H. L. (E.) be competent to any oneand certainly not to these persons
1896 themselvesto deny t hat they were shareholders.
SALOMON I must pause here to point out t ha t t he st at ut e enacts
SALOMON
n
t b i n g as to t he extent or degree of interest which may be
&Co
- held by each of the seven, or as to t he proportion of interest
SALOMON or influence possessed by one or t he majority of t he share-
, ' holders over t he others. One share is enough. Still less is
SALOMON, ^ p
0S S
i bi
e
to contend t ha t t he motive of becoming shareholders
i-oni Hawrary
o r 0
f making them shareholders is a field of inquiry which t he
st at ut e itself recognises as legitimate. If they are shareholders,
they are shareholders for all purposes; and even if t he st at ut e
was silent as to t he recognition of t r ust s, I should be prepared
to hold t hat if six of them were t he cestuis que t r ust of t he
seventh, whatever might be their ri ght s inter se, t he st at ut e
would have made them shareholders to all i nt ent s and purposes
with their respective rights and liabilities, and, dealing with
t hem in their relation to t he company, the only relations which
I believe the law would sanction would be t ha t they were
corporators of t he corporate body.
I am simply here dealing with t he provisions of t he st at ut e,
and it seems to me to be essential to t he artificial creation t ha t
t he law should recognise only t ha t artificial existencequite
apart from t he motives or conduct of individual corporators.
In saying this, I do not at all mean to suggest t ha t if it could
be established t hat t hi s provision of t he st at ut e to which I
am adverting had not been complied with, you could not go
behind t he certificate of incorporation to shew t ha t a fraud
had been committed upon t he officer entrusted with t he duty
of giving t he certificate, and t hat by some proceeding in t he
nat ur e of scire facias you could not prove t he fact t ha t t he
company had no real legal existence. But short of such proof
it seems to me impossible to dispute t ha t once t he company
is legally incorporated it must be treated like any other in-
dependent person with its rights and liabilities appropriate to
itself, and t ha t t he motives of those who took par t in t he
promotion of t he company are absolutely irrelevant in dis-
cussing what those ri ght s and liabilities are.
I will for t he sake of argument assume t he proposition t h a t
A. C. AND PRIVY COUNCIL. 31
t he Court of Appeal lays downthat t he formation of t h e H! L.(E.)
company was a mere scheme to enable Aron Salomon to carry 1896
on business in t he name of t he company. I am wholly unable SALOMON
to follow t h e proposition t h a t t hi s was contrary to t h e t r ue
SAL
o'
MON
i nt ent and meaning of t he Companies Act. I can only find &Co.
t he t rue i nt ent and meaning of t he Act from t he Act itself; SALOMON
and t he Act appears to me to give a company a legal existence .
0
'
with, as I have said, rights and liabilities of its own, whatever '
SALOMOi!r
-
may have been t he ideas or schemes of those who brought it ^" History
i nt o existence. '^~
I observe t hat t he learned judge (Vaughan Williams J.) held
t ha t t he business was Mr. Salomon's business, and no one
else's, and t ha t he chose to employ as agent a limited company;
and he proceeded to argue t ha t he was employing t ha t limited
company as agent, and t ha t he was bound to indemnify t ha t
agent (the company). I confess it seems to me t hat t ha t very
learned judge becomes involved by this argument in a very
singular contradiction. Ei t h e r t he limited company was a
legal entity or it was not . If it was, t he business belonged to
it and not to Mr. Salomon. If it was not , there was no person
and no thing to be an agent at a l l ; and it is impossible to say
at t he same time t h a t there is a company and there is not .
Lindley L . J. , on t he other hand, affirms t ha t there were
seven members of t he company; but he says it is manifest
t h a t six of them were members simply in order to enable t he
seventh himself to carry on business wi t h limited liability.
The object of t he whole arrangement is to do t he very thing
which t he Legislature intended not to be done.
It is obvious to inquire where is t h a t intention of t he Legis-
lature manifested in t he st at ut e. Even if we were at liberty to
insert words to manifest t ha t intention, I should have great
difficulty in ascertaining what t he exact intention t hus imputed
to t he Legislature is, or was. In t hi s particular case it is t he
members of one family t ha t represent all t he s har es ; but if t he
supposed intention is not limited to so narrow a proposition as
t hi s, t hat t he seven shareholders must not be members of one
family, to what extent may influence or authority or intentional
purchase of a majority among t he shareholders be carried so as
32 HOUSE OF LORDS [1897]
H. L. (E.) t o b r i n g i t wi t h i n t h e supposed p r o h i b i t i o n ? It i s , of c o u r s e ,
1896 eas y t o say t h a t i t wa s c o n t r a r y t o t h e i n t e n t i o n of t h e Le g i s l a -
SALOMON totfea pr opos i t i on wh i c h , by r e a s o n of i t s g e n e r a l i t y , i t i s
SALOMON difficult t o b r i n g t o t h e t e s t ; b u t wh e n one seeks t o p u t as a n
& Co. affirmative pr opos i t i on w h a t t h e t h i n g i s wh i c h t h e L e g i s l a t u r e
SALOMON h a s p r o h i b i t e d , t h e r e i s , as i t a p p e a r s t o me , a n i n s u p e r a b l e
v
' difficulty i n t h e wa y of t h o s e wh o seek t o i n s e r t by c o n s t r u c t i o n
SALOMON.
auc
j
ll a
pr ohi bi t i on i n t o t h e s t a t u t e .
Lord
r!c.
sbU17
^
s
one mode o f t e s t i n g t h e pr opos i t i on, i t woul d b e p e r t i n e n t
t o ask wh e t h e r t wo or t h r e e , or i ndeed all seven, ma y c o n s t i t u t e
t h e whol e o f t h e s h a r e h o l d e r s ? Wh e t h e r t h e y m u s t b e all
i n d e p e n d e n t of e a c h o t h e r i n t h e s ens e of e a c h h a v i n g an
i n d e p e n d e n t beneficial i n t e r e s t ? An d t h i s i s a que s t i on t h a t
c a n n o t b e a n s we r e d b y t h e r e pl y t h a t i t i s a m a t t e r o f de gr e e .
If t h e L e g i s l a t u r e i n t e n d e d t o p r o h i b i t s o me t h i n g , you o u g h t t o
kn o w w h a t t h a t s o me t h i n g i s . All i t h a s sai d i s t h a t o n e s h a r e
i s sufficient t o c o n s t i t u t e a s h a r e h o l d e r , t h o u g h t h e s h a r e s ma y
b e 100, 000 i n n u mb e r . Wh e r e a m I t o g e t from t h e s t a t u t e
itself a l i mi t a t i o n of t h a t pr ovi s i on t h a t t h a t s h a r e h o l d e r m u s t
be a n i n d e p e n d e n t a n d beneficially i n t e r e s t e d pe r s on ?
My L o r d s , I f i nd all t h r o u g h t h e ju d g me n t of t h e Cour t of
Appeal a r e p e t i t i o n of t h e s a me pr opos i t i on t o wh i c h I h a v e
al r eady a d v e r t e d t h a t t h e bus i ne s s wa s t h e bus i ne s s of Ar on
Sa l omon, a nd t h a t t h e c o mp a n y i s var i ous l y descri bed a s a
m y t h a n d a f i c t i o n . L o p e s L . J. s a y s : " Th e Ac t c o n t e mp l a t e d
t h e i nc or por a t i on of seven i n d e p e n d e n t bona f i de me mb e r s , wh o
h a d a mi n d a nd a wi l l of t h e i r o wn , a n d we r e n o t t h e me r e
p u p p e t s of an i ndi vi dua l wh o , a d o p t i n g t h e ma c h i n e r y of t h e
Ac t , c a r r i e d o n h i s old b u s i n e s s i n t h e s a me wa y a s before,
wh e n h e wa s a sole t r a d e r . " Th e wor ds "s e v e n i n d e p e n d e n t
b o n a f i de me mb e r s w i t h a mi n d a n d wi l l of t h e i r o wn , a n d
n o t t h e p u p p e t s of a n i n d i v i d u a l , " a r e by c o n s t r u c t i o n t o be
r e a d i n t o t h e Ac t . L o p e s L . J . also sai d t h a t t h e c o mp a n y wa s
a me r e n o mi n i s u mb r a . Ka y L . J . s a y s : " Th e s t a t u t e s we r e
i n t e n d e d t o al l ow seven or mo r e p e r s o n s , b o n a f i de associ at ed for
t h e p u r p o s e of t r a d e , t o l i mi t t h e i r l i abi l i t y u n d e r c e r t a i n
c ondi t i ons a n d t o become a c o r p o r a t i o n . Bu t t h e y we r e n o t
i n t e n d e d t o l egal i se a p r e t e n d e d as s oci at i on for t h e p u r p o s e of
e n a b l i n g an i ndi vi dua l t o c a r r y on h i s o wn bus i ne s s wi t h l i mi t ed H. L. (E.)
l i a b i l i t y in t h e n a m e of a jo i n t s t ock c o mp a n y . " 189G
My L o r d s , t h e l e a r ne d judge s a p p e a r t o m e n o t t o h a v e be e n SALOMON
a bs ol ut e l y c e r t a i n i n t h e i r own mi n d s w h e t h e r t o t r e a t t h e g
AL
JJ'
M0S
company as a r eal t h i n g or n o t . If i t wa s a r e a l t h i n g ; i f i t
&Co
-
h a d a l egal e xi s t e nc e , a nd if c ons e que nt l y t h e l a w a t t r i b u t e d t o SALOMON
i t c e r t a i n r i g h t s a n d l i abi l i t i es i n i t s c o n s t i t u t i o n as a c o mp a n y , .,
i t a p p e a r s t o me t o follow as a cons equence t h a t i t i s i mpos s i bl e
S AL O MO K
-
t o de ny t h e va l i di t y of t h e t r a n s a c t i o n s i n t o wh i c h i t h a s
Lord
"c.
l8bury
e n t e r e d .
Va u g h a n Wi l l i a ms J. a ppe a r s t o me t o h a v e di sposed o f t h e
ar gument t h a t t h e c o mp a n y ( whi ch for t h i s p u r p o s e h e a s s ume d
t o be a l egal e n t i t y ) wa s defrauded i n t o t h e p u r c h a s e of Ar on
S a l o mo n ' s bus i ne s s be c a us e , a s s u mi n g t h a t t h e pr i c e p a i d for
t h e bus i ne s s wa s a n e x o r b i t a n t o n e , a s t o wh i c h I a m myself
n o t satisfied, b u t a s s u mi n g t h a t i t wa s , t h e l e a r n e d ju d g e mo s t
c oge nt l y obser ves t h a t wh e n all t h e s h a r e h o l d e r s a r e per f ect l y
c o g n i s a n t of t h e c ondi t i ons u n d e r wh i c h t h e c o mp a n y i s formed
a n d t h e c ondi t i ons o f t h e p u r c h a s e , i t i s i mpos s i bl e t o c o n t e n d
t h a t t h e c o mp a n y i s be i ng def r auded.
Th e pr opos i t i on l ai d down i n Erlanger v. New Sombrero Phos-
phate Co. (1), ( I qu o t e t h e h e a d -n o t e ) , i s t h a t " Pe r s o n s wh o
p u r c h a s e p r o p e r t y a n d t h e n c r e a t e a c o mp a n y t o p u r c h a s e from
t h e m t h e p r o p e r t y t h e y pos s es s , s t a n d i n a f i d u c i a r y pos i t i on
t o wa r d s t h a t c o mp a n y , a n d m u s t fai t hful l y s t a t e t o t h e c o mp a n y
t h e f act s wh i c h appl y t o t h e p r o p e r t y , a n d woul d i nf l uence t h e
c o mp a n y i n deci di ng on t h e r e a s o n a b l e n e s s of a c qu i r i n g i t . "
Bu t i f every me mb e r of t h e c ompa nye ve r y s h a r e h o l d e r kn o ws
e xa c t l y w h a t i s t h e t r u e s t a t e of t h e f act s ( whi ch for t h i s p u r p o s e
m u s t b e a s s ume d t o b e t h e cas e h e r e ) , Va u g h a n Wi l l i a ms J. ' s
concl us i on s e e ms t o me t o be i n e v i t a b l e t h a t no cas e of fraud
u p o n t h e c o mp a n y coul d h e r e b e e s t a bl i s he d. If t h e r e wa s n o
fraud a n d no a ge nc y, a n d i f t h e c o mp a n y wa s a r e a l one a n d n o t
a f i ct i on or a m y t h , ever y one of t h e g r o u n d s u p o n wh i c h i t i s
s o u g h t t o s u p p o r t t h e ju d g me n t i s di sposed of.
My L o r d s , t h e t r u t h i s t h a t t h e l e a r ne d judge s h a v e n e v e r
allowed i n t h e i r own mi n d s t h e pr opos i t i on t h a t t h e c o mp a n y
(1) 3 App. Cas. 1218.
A. C. 1897. 3 D
H.L.(E.) h a s a r e a l e xi s t e nc e . Th e y , h a v e be e n s t r u c k. b y w h a t t h e y
1896 h a v e consi der ed t h e i ne xpe di e nc y of p e r mi t t i n g o n e m a n t o h e
SALOMON .in i nfl uence a nd a u t h o r i t y t h e wh o l e c o m p a n y ; and, , a s s u mi n g
SALOMON *kat
SW3n
-
a
*
n m
S could n o t h a v e be e n i n t e n d e d by t h e L e g i s -
,&Co. l a t u r e , t h e y h a v e s o u g h t v a r i o u s g r o u n d s u p o n wh i c h t h e y
SALOMON mi g h t i n s e r t i n t o t h e Ac t s ome p r o h i b i t i o n of s uch, a r e s u l t .
' ." Wh e t h e r s uc h, a r e s u l t be r i g h t ,or wr o n g , pol i t i c or i mp o l i t i c ,
SALOMON, J
s a y )
^ ^ ^ e ut mos t , deference t o t h e l e a r ne d judge s , t h a t
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rd
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we h a v e n o t h i n g t o
;
d o w i t h t h a t qu e s t i o n i f t h i s c o mp a n y
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h a s been dul y c o n s t i t u t e d b y l a w ; a n d , wh a t e v e r ma y b e t h e
mot i ve s of t h o s e wh o c o n s t i t u t e i t , I -must decl i ne t o i n s e r t
i n t o t h a t Ac t o f Pa r l i a me n t l i mi t a t i o n s wh i c h a r e n o t . t o b e
f ound t h e r e . ,
I h a v e de a l t w i t h this- m a t t e r u p o n t h e n a r r o w h y p o t h e s i s
pr opounde d b y t h e l e a r ne d judge s b e l o w ; b u t i t i s , I t h i n k, onl y
ju s t i c e t o t h e a p p e l l a n t t o say t h a t I see n o t h i n g wh a t e v e r t o
just i fy t h e i mp u t a t i o n s wh i c h a r e i mpl i ed i n s ome of t h e
obs e r va t i ons ma d e b y mo r e t h a n one o f t h e l e a r n e d ju d g e s .
Th e a p p e l l a n t , i n my opi ni on, i s n o t s h e wn t o h a v e done o r t o
h a v e i n t e n d e d t o d o a n y t h i n g d i s h o n e s t o r u n w o r t h y , b u t t o
h a v e suffered a g r e a t mi s f o r t u n e w i t h o u t a n y f a u l t of h i s o wn .
Th e r e s u l t i s t h a t I move y o u r L o r d s h i p s t h a t t h e ju d g me n t
appeal ed from be r e ve r s e d, b u t as t h i s i s a p a u p e r cas e, I r e g r e t
t o s ay i t c a n onl y b e w i t h s u c h c o s t s i n t h i s H o u s e a s a r e
a p p r o p r i a t e t o t h a t c ondi t i on o f t h i n g s , a nd t h a t t h e cr os s -
appeal b e di smi ssed w i t h cos t s t o t h e s a me e x t e n t .
L O R D WATS O N . My L o r d s , t h i s a ppe a l r a i s e s s ome qu e s t i o n s
of p r a c t i c a l i mp o r t a n c e , d e p e n d i n g u p o n t h e c o n s t r u c t i o n of t h e
Compa ni e s Ac t s , wh i c h d o n o t a p p e a r t o h a v e been s e t t l e d b y
pr e vi ous deci s i ons . As I a m n o t p r e p a r e d t o a c c e pt w i t h o u t
r e s e r v a t i o n al l t h e c onc l us i ons of f act w h i c h f ound f avour w i t h
t h e Cour t s bel ow, I s hal l , before a d v e r t i n g t o t h e l a w, s t a t e
w h a t I concei ve t o b e t h e ma t e r i a l f act s e s t a bl i s he d b y t h e
evi dence before u s . [ H i s L o r d s h i p s t a t e d t h e f act s above
set o u t . ]
Th e a l l e ga t i ons of t h e c o mp a n y , i n s o far as t h e y h a v e a n y
r e l a t i o n t o t h e a me n d e d cl ai m, t h e i r p i t h c ons i s t i ng i n t h e aver -
m e n t s ma d e on a me n d me n t , we r e m e a n t to convey a c h a r g e of H. L. (E.)
f r a u d ; a n d i t i s u n f o r t u n a t e t h a t t h e y a r e f r amed i n s u c h loose : 1896
and ge ne r a l t e r ms . A r e l e v a n t c h a r g e of f r aud o u g h t t o di scl ose SALOMON
f act s n e c e s s i t a t i n g t h e i nf er ence t h a t a fraud wa s per pet r at ed. g
A
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j
u p o n s o me p e r s o n specified. Wh e t h e r i t wa s a f r aud u p o n t h e
&
.
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c o mp a n y a n d i t s me mb e r s , or u p o n p e r s o n s wh o h a d deal i ngs SALOMON
w i t h t h e c o mp a n y , i s n o t i n d i c a t e d , a l t h o u g h t h e r e ma y b e ' .
9
'
ve r y different c ons i de r a t i ons appl i cabl e t o t h o s e t wo c a s e s . Th e
S AL OMQ
'
V
-
r e s gestee w h i c h m i g h t i mp l y t h a t i t wa s t h e a p p e l l a n t , a n d n o t
hml Wata)
"-
t h e c o mp a n y , w h o a c t ua l l y car r i ed o n i t s b u s i n e s s , a r e n o t s et '
f o r t h . An y p e r s o n wh o hol ds a p r e p o n d e r a t i n g s h a r e i n t h e
s t ock of a l i mi t e d c o mp a n y h a s neces s ar i l y t h e i n t e n t i o n of
. t a ki n g t h e l i o n ' s s h a r e o f i t s pr of i t s w i t h o u t a n y r i s k b e y o n d
loss of t h e mo n e y wh i c h he h a s p a i d for, or i s l i abl e t o p a y u p o n
h i s s h a r e s ; a n d t h e f act of h i s a c qu i r i n g a n d h o l d i n g d e b e n t u r e s
s ecur ed u p o n t h e a s s e t s o f t h e c o mp a n y does n o t d i mi n i s h t h e
r i s k o f t h a t l os s . Wh a t i s m e a n t b y t h e a s s e r t i o n t h a t t h e
c o mp a n y " wa s t h e me r e n o mi n e e o r a g e n t " o f t h e a p p e l l a n t
I c a n n o t g a t h e r f r om t h e r e c o r d ; a n d I a m n o t s u r e t h a t I
u n d e r s t a n d pr eci s el y i n w h a t s ens e i t wa s i n t e r p r e t e d b y t h e
l e a r n e d ju d g e s wh o s e deci s i ons we h a v e t o cons i der .
No a d d i t i o n a l proof wa s led af t er t h e a me n d me n t of t h e
c o u n t e r -c l a i m. . Th e or al t e s t i mo n y h a s ve r y l i t t l e , i f a n y ,
b e a r i n g u p o n t h e second cl ai m ; a n d a n y ma t e r i a l f a c t s r e l a t i n g
t o t h e f r a u d u l e n t object s wh i c h t h e a p p e l l a n t i s sai d t o h a v e
h a d i n vi ew, a n d t h e al l eged pos i t i on of t h e c o mp a n y a s h i s
n o mi n e e or a g e n t , m u s t be me r e m a t t e r of i nf er ence deri ved
from t h e a g r e e me n t s o f Ju l y 2 0 a n d Au g u s t 2 , 1892, t h e
me mo r a n d u m a n d a r t i c l e s of a s s oc i a t i on, a n d t h e mi n u t e -b o o k
;
of t he company.
On rehearing t he case Vaughan Williams J. , without dis-
posing of t h e original claim, gave t he company decree of
indemnity in terms of their amended claim. I do not profess
my ability to follow accurately t he whole chain of reasoning by
which t he learned judge arrived at t h a t conclusion; but he
appears to have proceeded mainly upon t he ground t ha t t he
appellant was in t r ut h t he company, t he other members being
either his trustees or mere " dummies," and consequently t hat
3 D 2
3G
H. L . ( B. )
189C
SALOMON
v.
SALOMON
&Co.
S AL O MO N
&Co .
v.
SALOMON.
Lord Watson.
t he appellant carried on what was truly his own business under
cover of t he name of t he company, which was nothing more
t han an alias for Aron Salomon. On appeal from his de-
cision, t he Court of Appeal, consisting of Lindley, Lopes,
and Kay L . J J. , made an order finding it unnecessary to deal
with t he original claim, and dismissing t he appeal in so far as
it related to t he amended claim. The ratio upon which t hat
affirmance proceeded, as embodied in t he order, wa s : " Thi s
Court being of opinion t hat t he formation of t he company, t he
agreement of August, 1892, and t he issue of debentures to Aron
Salomon pursuant to such agreement, were a mere scheme to
enable him to carry on business in t he name of t he company,
wi t h limited liability, contrary to t he t r ue i nt ent and meaning of
t he Companies Act, 1862, and further to enable him to obtain a
preference over other creditors of t he company by procuring a
first charge on t he assets of t he company by means of such
debentures." The opinions delivered by t he Lords Justices
are strictly in keeping with t he reasons assigned in their
order. Lindley L . J. , observing "t h a t t he incorporation of
t he company cannot be disputed," refers to t he scheme for t he
formation of t he company, and says ( 1) : " t he object of t he
whole arrangement is to do t he very t hi ng which t he Legislature
intended not to be done " ; and he adds t hat " Mr. Salomon's
scheme is a device to defraud creditors."
Assuming t hat t he company was well incorporated in terms
of t he Act of 1862, an assumption upon which t he decisions
appealed from appear to me to throw considerable doubt, I
think it expedient, before considering t he amended claim, to
deal wi t h t he original claim for rescission, which was strongly
pressed upon us by counsel for the company, under their cross-
appeal. Upon t h a t branch of t he case there does not appear to
me to be much room for doubt. Wi t h this exception, t hat t he
word " exor bi t ant " appears to me to be too strong an epithet,
I entirely agree wi t h Vaughan Williams J. when he says : " I
do not think t hat where you have a private company, and all t he
shareholders in t he company are perfectly cognisant of t he con-
ditions under which t he company is formed, and the conditions
( 1 ) [ 1 8 9 5] 2 Ch. 337, 339.
of t he purchase by t he company, you can possibly say t ha t pur- H. L. (E.)
chasing at an exorbitant price (and I have no doubt whatever 1896
t hat t he purchase here was at an exorbitant price) is a fraud B
AL
^
M
'ON
upon those shareholders or upon t he company." The learned
g
"
judge goes on to say t ha t t he circumstances might have &Co.
amounted to fraud if t here had been an intention on t he par t of SALOMON
the original shareholders " to allot further shares at a later period
&
'
to future allottees." Upon t ha t point I do not find i t necessary SALOMON.
to express any opinion, because it is not raised by t he facts Lord waison.
of t he case, and, in any view, these considerations are of no
relevancy in a question as to rescission between t he company
and t he appellant.
Mr. Farwell argued t ha t t h e agreement of August 2 ought
to be set aside upon t he principle followed by t hi s House in
Erlanger v. New Sombrero Phosphate Co. (1) In t h a t case
t he vendor, who got up t he company, with t he view of selling
his adventure to i t , attracted shareholders by a prospectus which
was essentially false. The directors, who were virtually his
nominees, purchased from him without being aware of t h e
real facts ; and on their assurance t hat , in so far as they knew,
all was right, t he shareholders sanctioned t he transaction. The
fraud by which t he company and its shareholders had been
misled was directly traceable to t he vendor ; and it was set
aside at t he instance of t he liquidator, t he Lor d Chancellor
(Earl Cairns) expressing a doubt whether, even in those circum-
stances, t he remedy was not too late after a liquidation order.
Bu t in t hi s case t he agreement of Jul y 20 was, in t he full
knowledge of t he facts, approved and adopted by t he company
itself, if there was a company, and by all t he shareholders who
ever were, or were likely to be, members of the company. In
my opinion, therefore, Erlanger v. New Sombrero Phosphate
Co. (1) has no application, and the original claim of t he
liquidator is not maintainable.
The Lords Justices of Appeal, in disposing of t h e amended
claim, have expressly found t ha t t he formation of the company,
with limited liability, and t he issue of 10,0002. worth of its
debentures to t he appellant, were " contrary to t he t rue i nt ent
(1) 3 App. Cas. 1218.
38
H O U S E O F L O R D S [ 1897]
H. L. (B. )
1896
SALOMON
I
SALOMON
&'Co.
SALOMON
&Oo.
v.
SALOMON.
Lord Watson.
and meaning of t he Companies Act, 1862." I have had great
difficulty in endeavouring to interpret t hat finding. I am
unable to comprehend how a company, which has been formed
contrary to t he true i nt ent and meaning of a st at ut e, and (in
the language of Lindley L. J. ) does t he very thing which t he
Legislature intended not to be done, can yet be held to have
been legally incorporated in terms of t he st at ut e. " Int ent i on
of the Legislature " is a common but . ver y slippery phrase,
which, popularly understood, may signify anything from inten-
tion embodied in positive enactment to speculative opinion as
to what the Legislature probably would have meant , although
there has been an omission to enact i t . In a Court of La w or
Equi t y, what t he Legislature intended to be done or not to be
done can only be legitimately ascertained from t ha t which it
has chosen to enact, either in express words or by reasonable
and necessary implication. - Accordingly, if t he words " i nt ent
and meaning," as they occur in t he finding of t he Appeal Court,
are used in their proper legal sense, it follows, in my opinion,
t ha t t he company has not been well incorporated ; t ha t , there
being no legal corporation, there can be no liquidation under
t he Companies Acts, and t hat t he counter-claim preferred by its
liquidator must fail. In t ha t case its creditors would not be
left without a remedy, because its members, as joint traders
without limitation of their liability, would be jointly and
severally responsible for t he debts incurred by them in t he
name of t he company.
The provisions of t he Act of 1862 which seem to me to have
any bearing upon this point lie within a very narrow compass.
Sect. 6 provides t hat any seven or more persons, associated for
a lawful purpose, such as t he manufacture and sale of boots,
may, by subscribing their names to a memorandum of associa-
tion and otherwise complying with t he provisions of t he Act in
respect of registration, form a company wi t h or without limited
liability; and s. 8, which prescribes t he essentials of t he memo-
randum in the case of a company limited by shares, inter alia,
enacts t hat " no subscriber shall take less t han one shar e. "
The first of these enactments does not require t ha t t he persons
subscribing shall not be related to each o t h e r ; and t he second
plainly imports t hat t he holding of a single share affords a suffi- H. L. (E.)
cient qualification for member shi p; and I can find no ot her' 1896
rule laid down or eveU suggested in t he Act. Nor does t he SALOMON
st at ut e, either expressly or by implication, impose any limit'
SAL
O
MON
upon t he number of shares which a single member may sub- & Co.
scribe for or take by allotment. At t he date of registration all- SALOMON
t he requirements of
1
t he Ac t 'h a d been complied wi t h;'and, - as ^"
mat t ers t hen stood, there does not appear to have been any SALOMON.
room for t he pleas now advanced by t he .liquidator.' The com- LOT* wanm.
pany was still free to modify or reject t he agreement of Jul y 20 ;>
and t h e fraud of which t h e appellant has been held guilty by
t he Court of Appeal, though it may have existed in animo, had
not been carried into execution-by t he acceptance of t he agree-
ment , t he issue of debentures to t h e appellant in t erms of i t ,
and by his receiving an allotment of shares which increased his
interest in t h e company to f-ftgg-f of its actual capital. I have
already i nt i mat ed'my opinion t ha t t h e acceptance of t h e agree-
ment is binding- on t he company; and neither t h a t acceptance,
nor t he preponderating share of t he appellant, nor his payment '
in debenkires, being forbidden by t h e Act, I do not t hi nk t ha t
any one' of these t hi ngs could subsequently render t h e registra-
tion of t he company; invalid. Bu t I am willing to assume t ha t
proceedings'which are permitted by t h e Act may be-so used by
t he members of a limited company as to constitute a fraud upon
others, to whom they in- consequence incur personal liability.
In t hi s case t he fraud is found to have been committed by t h e
appellant against t h e creditors of t he company; but it is clear
t ha t if so', t hough. he may have been its originator and t h e only
person who took benefit'from i t ; he could not have done any
one of those t hi ngs, which taken together' are said to consti-
t ut e his fraud, without t he consent and
-
privity of t he other
shareholders.- It seems doubtful whether a liquidator as repre-
senting and in t he name of t he company can sue its members'
for redress against a fraud which was committed' by t he com-
pany itself and by > a l l ' i t s shareholders. However, I do not
t hi nk'i t necessary to dwell upon t ha t point, because I am not
satisfied t ha t t h e charge of 'fraud against creditors has any
foundation in fact. .
40
HOUSE OF LORDS [1897],
H. L. (E.)
1806
S AL O MO N
v.
SALOMON
&CO .
S AL O MO N
&Co .
v.
SALOMON.
Lord Watson.
The memorandum of association gave notice t ha t t he main
object for which t he company was formed was to adopt and
carry into effect, with or without modifications, t he agreement,
of Jul y, 1892, in terms of which the debentures for 10,000Z.
were subsequently given to t he appellant in par t payment of
t he price. By t he articles of association (art. 62 (e)) t he
directors were empowered to issue mortgage or other debentures,
or bonds for any debts due, or to become due, from t he com-
pany ; and it is not alleged or proved t hat there was any failure
to comply with s. 43 or t he other clauses (Part III. of t he Act)
which relate to t he protection of creditors. The unpaid
creditors of t he company, whose unfortunate position has been
attributed to t he fraud of t he appellant, if they had t hought fit
to avail themselves of t he means of protecting their interests-
which the Act provides, could have informed themselves of t h e
terms of purchase by t he company, of t he issue of debentures,
to the appellant, and of t he amount of shares held by each
member. In my opinion, t he st at ut e casts upon them t he
duty of making inquiry in regard to these mat t er s. What ever
may be the moral duty of a limited company and its share-
holders, when t he trade of t he company is not thriving, t he
law does not lay any obligation upon them to warn those
members of the public who deal with them on credit t hat they
run t he risk of not being paid. One of t he learned judges
asserts, and I see no reason to question t he accuracy of h i s
statement, t ha t creditors never think of examining t he register
of debentures. Bu t t he apathy of a creditor cannot justify an
imputation of fraud against a limited company or its members,
who have provided all the means of information which t he Act
of 1862 requires ; and, in my opinion, a creditor who will not
take t he trouble to use t he means which t he st at ut e provides-
for enabling him to protect himself must bear t he consequences
of his own negligence.
For these reasons I have come to t he conclusion t hat t h e
orders appealed from ought to be reversed, with costs to t he
appellant here and in both Courts below. Hi s costs in this-
House must, of course, be taxed in accordance wi t h t he rule
applicable to pauper litigants.
A. C. AN D PR IVY CO U N CIL .
41
LORD HBRSCHELL. My Lords, by an order of t he High
Court, which was affirmed by t he Court of Appeal, it was
declared t hat t he respondent company, or the liquidator of t hat
company was entitled to be indemnified by the appellant against
the sum of 77332.8s. 3d., and it was ordered t hat the respondent
company should recover t hat sum against the appellant.
On Jul y 28, 1892, t he respondent company was incorporated
with a capital of 40.000Z. divided into 40,000 shares of 11. eaclu
One of t he objects for which t he company was incorporated was
to carry out an agreement, with such modifications therein as
might be agreed to, of Jul y 20,1892, which had been entered into
between t he appellant and a trustee for a company intended to
be formed, for t he acquisition by t h e company of t he business
then carried on by t he appellant. The company was, in fact,
formed for t he purpose of taking over t he appellant's business
of leather merchant and boot manufacturer, which he had
carried on for many years. The business had been a prosperous
one, and, as t he learned judge who tried t he action found, was
solvent at t he time when t he company was incorporated. The
memorandum of association of t he company was subscribed by
the appellant, his wife and daughter, and his four sons, each
subscribing for one share. The appellant afterwards had
20,000 shares allotted to hi m. For these he paid 11. per
share out of t he purchase-money which by agreement he was .
to receive for t he transfer of his business to t he company.
The company afterwards became insolvent and went into
liquidation.
In an action brought by a debenture-holder on behalf of
himself and all t he other debenture-holders, including t he appel-
l ant , t he respondent company set up by way of counter-claim
t h a t t he company was formed by Aron Salomon, and t he
debentures were issued in order t hat he might carry on t he
said business, and take all t he profits without risk to himself;
t ha t t he company was t he mere nominee and agent of Aron
Salomon; and t ha t t he company or t he liquidator thereof was
entitled to be indemnified by Aron Salomon against all t he
debts owing by t he company to creditors other t han Aron
Salomon. This counter-claim was not in t he pleading as
H . L. ( E. )
1896
S AL O MO N
v.
SALOMON
& Co.
SALOMON
& Co.
v.
SALOMON.
H. L. (E.) originally delivered ; it was inserted by way of amendment at
1896 t he suggestion of VaUghan Williams J. , before whom t he
SALOMON action came on for trial. The learned judge t hought t he
SALOMON liquidator entitled to t he relief asked for, and made t he order
&
Co. complained of. He was of opinion t ha t t he company was
SALOMON only an "a l i a s " for Salomon; t hat , t he intention being t hat
.
0
' he should t ake t he profits without runni ng t h e risk of t h e
SALOMON. <}
e
bts, t heconi pany was merely an agent for hi m, and, having
LoidHersoheii. incurred liabilities at his instance, was, like any other agent:
under such circumstances, entitled to be indemnified b y
him against t hem. On appeal t he judgment of Vaughan'
Williams J. was affirmed by t he Court of Appeal, t ha t Court
" being of opinion t ha t t he formation of t he company, t he
agreement of August, 1892, and t he issue of debentures to
Aron Salomon pursuant to such agreement were a mere
scheme to enable him to carry on business in t he name of
t he company with limited liability contrary to t he t r ue i nt ent
and meaning of the.Companies Act, 1862, and further to enable
him to obtain a preference over other creditors of t he company
by procuring a first charge on t he assets of t he company by
means of such debentures."
The learned judges in t he Court of Appeal dissented from
t he view taken by Vaughan Williams J. , t ha t t he company
was to be regarded as t he agent of t he appellant. They'
considered t he relation between them to be t hat of trustee and
cestui que t r u s t ; but t hi s difference of view, of course, did not
affect t h e conclusion t ha t t he ri ght to t he indemnity claimed
had been established.
It is to be observed t ha t bot h Courts treated t h e company as
a legal entity distinct from Salomon and t he t hen members who
composed.it, and therefore as a validly constituted corporation.
This is, indeed, necessarily involved in t he judgment which
declared t hat t he company was entitled to certain ri ght s as
against Salomon. Under these circumstances,' I am at a loss to
understand what is meant by saying t ha t A: Salomon & Co.,
Limited, is but an " alias ""for A. Salomon. It is not another
name'f or t h e same per son; t he company is ex hypothesi a
distinct legal persona. As l i t t l e am I able to adopt t he view
t ha t the company was' t he agent of Salomon to carry on his H. L. (E.)
business for hi m. In a popular sense, a company may in every 1896
case be said to carry on business for and on behalf of its share- SALOMON
hol ders; but t hi s certainly does not i n'poi nt of law const i t ut e' g'
AL
o'
MON
t he relation of principal and agent between t hem or render t he ^Co-
shareholders liable to indemnify t he company against t he debts SALOMON
which it incurs. Her e, it i s ' t rue, Salomon owned all t he ,
shares except six, so t ha t if t h e ' business -were profitable he
SAr
&
M
Qff-
would be entitled, substantially, to t he whole of t he profits.
Lord
H""iu.
The other shareholders, too, are said to have been " dummi es, "'
t he nominees of Salomon. Bu t when once it is 'conceded t ha t
they were individual members of t h e company distinct from
Salomon, and sufficiently so to b r i n g ' i n t o ' e x i s t e n c e ' i n con-'
junction with him a Validly coiistituted "corporation, "I ' am
unable to see how t h e facts to which I have just referred can
affect t he legal position of t he company, or give it rights as
against its members which it would not otherwise possess.
The Court of Appeal based their judgment on t he proposition'
t hat t he formation of t he company and all t h a t followed on it
were a mere scheme to enable t he appellant t o 'c a r r y on busi-
ness in t he name of t he company/wi t h limited liability, con-
trary to t he t r ue i nt ent and meaning of t h e Companies" Act',
1862. The conclusion which they drew from t hi s premiBswas,
t ha t t he company was a t rust ee and Salomon their cestui *que'
t r ust . I cannot t hi nk t ha t t he conclusion' follows even if- t he
premiss be sound. It seems' "to me t ha t t he logical' result
would be t ha t t he'company had not been validly constituted,'
and therefore had no legal existence.' But , apart from' this
-
, i t '
is necessary |to examine t he proposition on which t he Court-
have rested t hei r judgment','as its effect would be far reaching.'
Many industrial and banking concerns of "the highest standing
and credit have, in recent years, been, to use a common expres-.
sion, converted into joint stock companies,' and often into what
are called " private " companies, where t he Whole of t he shares,
are held by t he f or mer . par t ner s. It appears-to me t ha t all'
these mi ght be pronounced "s chemes t o e n a b l e " t hem " t o
carry on business i n-t he name of t he company, 'wi t h limited
liability," in t he very sense in which those words are used in
H. L. ( E. )
1896
SALOMON
v.
SALOMON
&Co .
SALOMON
&Co.
v.
S AL O MO N .
Lord Herscbell.
the judgment of the Court of Appeal. The profits of t h e
concern carried on by t he company will go to t he persons
whose business it was before t he transfer, and in t he same
proportions as before, t he only difference being t ha t t he liability
of those who take t he profits will no longer be unlimited. Th e
very object of t he creation of t he company and t he transfer to
it of t he business is, t hat whereas t he liability of t he par t ner s
for debts incurred was without limit, t he liability of t h e
members for t he debts incurred by t he company shall be
limited. In no other respect is it intended t hat there shall be
any difference : t he conduct of t he business and t he division of
the profits are intended to be t he same as before. If t he judg-
ment of t he Court of Appeal be pushed to its logical conclusion,
all these companies must , I t hi nk, be held to be trustees for
t he partners who transferred t he business to t hem, and those
partners must be declared liable without limit to discharge t h e
debts of t he company. F o r t hi s is t he effect of t he judgment
as regards the respondent company. The position of t he
members of a company is just t he same whether they ar e
declared liable to pay t he debts incurred by t he company, or by
way of indemnity to furnish t he company wi t h t he means of
paying t hem. I do not think t he learned judges in t he Court
below have contemplated t h e application of t hei r judgment to
such cases as I have been considering; but I can see no solid
distinction between those cases and t he present one.
It is said t ha t t he respondent company is a " one man "
company, and t hat in this respect it differs from such companies
as those to which I have alluded. But it has often happened
t ha t a business transferred to a joint stock company has been
t he property of three or four persons only, and t hat t he other
subscribers of t he memorandum have been clerks or other
persons who possessed little or no interest in t he concern. I
am unable to see how it can be lawful for three or four or six
persons to form a company for t he purpose of employing their
capital in trading, wi t h t he benefit of limited liability, and n o t
for one person to do so, provided, in each case, t he requirements
of t he st at ut e have been complied with and t he company has
been validly constituted. How does it concern t he creditor
w h e t h e r t h e c a p i t a l o f t h e c o m p a n y i s o w n e d b y s e v e n p e r s o n s H. L . (E.)
i n e qu a l s h a r e s , w i t h t h e r i g h t t o a n e qu a l s h a r e o f t h e p r o f i t s , 1896
o r w h e t h e r i t i s a l m o s t e n t i r e l y o w n e d b y o n e p e r s o n , w h o SALOMON
p r a c t i c a l l y t a ke s t h e w h o l e o f t h e p r o f i t s ? Th e c r e d i t o r h a s g
AL
o
MON
n o t i c e t h a t h e i s d e a l i n g w i t h a c o m p a n y t h e l i a b i l i t y o f t h e
& Co
-
m e m b e r s of w h i c h i s l i m i t e d , a n d t h e r e g i s t e r of s h a r e h o l d e r s SALOMON
i n f o r m s h i m h o w t h e s h a r e s a r e h e l d , a n d t h a t t h e y a r e s u b - v.
stantially in t he hands of one person, if this be t he fact. The
AL0M0V
creditors in t he present case gave credit to and contracted with
Lord Hersche
"-
a l i m i t e d c o m p a n y ; t h e effect o f t h e d e c i s i o n i s t o g i v e t h e m
t h e b e n e f i t , a s r e g a r d s o n e o f t h e s h a r e h o l d e r s , o f u n l i m i t e d
l i a b i l i t y . I h a v e s a i d t h a t t h e l i a b i l i t y o f p e r s o n s c a r r y i n g o n
b u s i n e s s c a n o n l y b e l i m i t e d p r o v i d e d t h e r e qu i r e m e n t s o f t h e
s t a t u t e b e c o mp l i e d w i t h ; a n d t h i s l e a d s n a t u r a l l y t o t h e i n qu i r y ,
Wh a t a r e t h o s e r e qu i r e m e n t s ?
Th e Co u r t o f Ap p e a l h a s d e c l a r e d t h a t t h e f o r m a t i o n o f t h e
r e s p o n d e n t c o m p a n y a n d t h e a g r e e m e n t t o t a ke o v e r t h e b u s i -
n e s s o f t h e a p p e l l a n t w e r e a s c h e m e " c o n t r a r y t o t h e t r u e
i n t e n t a n d m e a n i n g o f t h e Co m p a n i e s Ac t . " I kn o w o f n o
m e a n s o f a s c e r t a i n i n g w h a t i s t h e i n t e n t a n d m e a n i n g o f
t h e Co m p a n i e s Ac t e x c e p t b y e x a m i n i n g i t s p r o v i s i o n s a n d
f i n d i n g w h a t r e g u l a t i o n s i t h a s i m p o s e d a s a c o n d i t i o n o f
t r a d i n g w i t h l i m i t e d l i a b i l i t y . Th e m e m o r a n d u m m u s t s t a t e
t h e a m o u n t o f t h e c a p i t a l o f t h e c o m p a n y a n d t h e ' n u m b e r o f
s h a r e s i n t o w h i c h i t i s d i v i d e d , a n d n o s u b s c r i b e r i s t o t a ke l e s s
t h a n o n e s h a r e . Th e s h a r e s m a y , h o w e v e r , b e o f a s s m a l l a
n o m i n a l v a l u e a s t h o s e w h o f o r m t h e c o m p a n y p l e a s e : t h e
s t a t u t e p r e s c r i b e s n o m i n i m u m ; a n d t h o u g h t h e r e m u s t b e
s e v e n s h a r e h o l d e r s , i t i s e n o u g h i f e a c h o f t h e m h o l d s o n e
s h a r e , h o w e v e r s m a l l i t s d e n o m i n a t i o n . Th e L e g i s l a t u r e , t h e r e -
f o r e , c l e a r l y s a n c t i o n s a s c h e m e b y w h i c h a l l t h e s h a r e s e x c e p t
s i x a r e o w n e d b y a s i n g l e i n d i v i d u a l , a n d t h e s e s i x a r e o f a
v a l u e l i t t l e m o r e t h a n n o m i n a l .
It w a s s a i d t h a t i n t h e p r e s e n t c a s e t h e s i x s h a r e h o l d e r s
o t h e r t h a n t h e a p p e l l a n t w e r e m e r e d u m m i e s , h i s n o m i n e e s ,
a n d h e l d t h e i r s h a r e s i n t r u s t f or h i m . I wi l l a s s u m e t h a t t h i s
w a s s o . In m y o p i n i o n , i t m a ke s n o di f f e r e nc e . Th e s t a t u t e
f o r b i d s t h e e n t r y i n t h e r e g i s t e r o f a n y t r u s t ; a n d i t c e r t a i n l y
H. L. (E.) .contains no enactment t ha t each of t he seven persons sub-
1896 scribing the memorandum must be beneficially entitled to t he
SALOMON share or shares for which he- subscribes. The persons who
SALOMON subscribe the memorandum, or who have agreed to become
* Co. members of the company and whose names are on t he register,
SALOMON are alone regarded as, and in fact are; t he shareholders. Th e y
v
_ ' are subject to all the liability which attaches to t he holding of
SALOMON. t
n e
share. They can be compelled to make any payment
L<mi HCTBCIICII. which the ownership of a share involves. Whet her they are
beneficial owners or bare trustees is a mat t er with which
neither t he company nor creditors have anything to d o : it
concerns only them and their cestuis que t r ust if t hey have
any. If, t hen, in t he present case all t he requirements of t he
st at ut e were complied with, and a company was effectually
constituted, and this is t he hypothesis of t he judgment appealed
from, what warrant is there for saying t hat what was done was
contrary to t he true i nt ent and meaning of t he Companies Act ?
It may be t ha t a company constituted like t ha t under con-
sideration was not in t he contemplation of t he Legislature at
t h e t i me when the Act authorizing limited liability was passed ;
t hat if what is possible under t he enactments as they stand
had been foreseen a minimum sum would have been fixed as
t he least denomination of share permissible; and t ha t it would
have been made a condition t hat each of t he seven persons
should have a substantial interest in t he company. Bu t we
have to interpret t he law, not to make i t ; and it must be
remembered t hat no one need t r ust a limited liability company
unless he so please, and t ha t before he does so he can ascertain,
if he so please, what. is t he capital of t he company and how it
is held.
I have hi t hert o made no reference to t he debentures which
t he appellant received in part-payment of t he purchase-money
of t he business which he transferred to t he company. These
are referred to in t he judgment as part of t he scheme which is
pronounced contrary to t he t r ue i nt ent and meaning of t h e
Companies Act. But if apart from this the conclusion t ha t
t he appellant is bound to indemnify t he company against its
debts cannot be sustained, I do not see how t he circumstance.
t h a t he recei ved t h e s e d e b e n t u r e s can- avai l t h e r e s p o n d e n t H. L. (E,)
c o mp a n y . Th e . i s s u e of d e b e n t u r e s to t h e ve ndor of. a bus i ne s s 1896
as p a r t of t h e pr i ce is c e r t a i n l y ope n t o g r e a t a b u s e , and h a s SALOMON
oft en wor ked g r a v e mi schi ef. I t ma y wel l b e t h a t s o me check
S AI O
'
MO N
s houl d be pl aced u p o n t h e p r a c t i c e , a n d t h a t , at all e v e n t s ,
&
Co.
a mp l e n o t i c e t o all wh o ma y h a v e deal i ngs w i t h t h e c o mp a n y SALOMON
s h o u l d b e s e c ur e d. Bu t a s t h e l a w a t p r e s e n t s t a n d s , t h e r e i s '
c e r t a i n l y n o t h i n g unl a wf ul i n t h e c r e a t i o n of s u c h d e b e n t u r e s . SALOMON.
F o r t h e s e r e a s ons . I h a v e c ome t o t h e concl us i on t h a t t h e appeal
Lord
Herscheii.
s houl d be al l owed.
It wa s c o n t e n d e d o n behal f o f t h e c o mp a n y t hat , t h e a gr e e -
m e n t b e t we e n t h e m a n d t h e a p p e l l a n t o u g h t , a t all e v e n t s , t o
be s et asi de on t h e g r o u n d of f r aud. I n my opi ni on, , no s u c h
case h a s been ma d e o u t , a n d I d o n o t t h i n k t h e -respondent
c o mp a n y a r e e n t i t l e d t o a n y s u c h relief.-
L O R D MACN AG H TE N . . My . Lo r d s , I c a n n o t , h e l p . t h i n ki n g
t h a t t h e a p p e l l a n t , Ar on S a l o mo n , . h a s been, de a l t wi t h , s ome -
w h a t h a r d l y i n t h i s cas e.
t
. .
Mr . Sa l o mo n , wh o i s n o w s u i n g a s a p a u p e r , wa s a we a l t h y
m a n i n Ju l y , 1892. He was , a boot a n d s hoe ma n u f a c t u r e r
t r a d i n g on h i s own sole a c c o u n t u n d e r t h e f i r m of " A. Sa l omon
& Co . , " i n H i g h S t r e e t , Wh i t e c h a p e l , wh e r e h e h a d e xt e ns i ve
wa r e h o u s e s a n d a l a r g e e s t a b l i s h me n t . He h a d be e n i n t h e
t r a d e over t h i r t y y e a r s . He h a d lived i n t h e s a me n e i g h b o u r -
hood all a l ong, a n d for m a n y ye a r s p a s t h e h a d occupi ed t h e
s a me p r e mi s e s . So far t h i n g s h a d gone ve r y wel l wi t h h i m .
Be g i n n i n g w i t h l i t t l e o r n o c a p i t a l , h e h a d gr a dua l l y b u i l t u p a
t h r i v i n g b u s i n e s s , a n d h e wa s u n d o u b t e d l y i n good c r e d i t , a nd
r e p u t e .
It i s i mpos s i bl e t o s ay e xa c t l y w h a t t h e v a l u e o f t h e bus i ne s s
wa s . Bu t t h e r e wa s a s u b s t a n t i a l s u r p l u s of a s s e t s over l i a-
bi l i t i es . An d i t s e e ms t o me t o b e p r e t t y cl ear t h a t i f Mr .
Sa l omon h a d been mi n d e d t o di spose of h i s bus i ne s s i n t h e
ma r ke t a s a goi ng c o n c e r n h e m i g h t fairly h a v e c o u n t e d u p o n
r e t i r i n g w i t h a t l e a s t 10,000Z. i n h i s p o c ke t .
Mr . Sa l o mo n , howe ve r , di d n o t w a n t t o p a r t wi t h t h e b u s i -
n e s s . He h a d a wife a n d a f ami l y c o n s i s t i n g of f i ve sons a nd a
H. L. (E.)
1896
SALOMON
v.
SALOMON
&Co.
SALOMON
&Co.
v.
SALOMON.
LOTCI
Ma c n a g l i t c u .
daughter. Four of t he sons were working with their father.
The eldest, who was about t hi rt y years of age, was practically
the manager. But t he sons were not p a r t n e r s : they were
only servants. Not unnaturally, perhaps, they were dissatisfied
with their position. They kept pressing their father to give
them a share in t he concern. " They troubled me , " says Mr.
Salomon, " all t he while." So at length Mr. Salomon did what
hundreds of others have done under similar circumstances. He
turned his business into a limited company. He wanted, he
says, to extend t he business and make provision for his family.
In those words, I think, he fairly describes t h e principal
motives which influenced his action.
All t he usual formalities were gone t hr ough; all t he require-
ments of t he Companies Act, 1862, were duly observed. There
was a contract wi t h a trustee in t he usual form for the> sale of
t he business to a company about to be formed. There was a
memorandum of association duly signed and registered, stating
t hat t he company was formed to carry t hat contract into effect,
and fixing t he capital at 40,000?. in 40,000 shares of 11. each.
There were articles of association providing the usual machinery
for conducting t he business. The first directors were to be
nominated by t he majority of t he subscribers to t he memo-
randum of association. ' The directors, when appointed, were
authorized to exercise all such powers of t he company as were
not by st at ut e or by t he articles required to be exercised in
general me e t i ng; and there was express power to borrow on
debentures, with t he limitation t hat t he borrowing was not to
exceed 10.000Z. without t he sanction of a general meeting.
The company was intended from t he first to be a private
company; it remained a private company to t he end. No
prospectus was i ssued; no invitation to take shares was ever
addressed to t he public.
The subscribers to t he memorandum were Mr. Salomon, his
wife, and five of his children who were grown up. The sub-
scribers met and appointed Mr. Salomon and his two elder
sons directors. The directors t hen proceeded to carry out t he
proposed transfer. By an agreement dated August 2, 1892,
t he company adopted t he preliminary contract, and in accord-
A.C.
AND PRIVY COUNCIL.
49
ance with it t h e business was taken over by t he company as
from Ju n e 1,1892. The price fixed by t h e contract was duly
paid. The price on paper was extravagant. It amounted to
over 39,000?.a sum which represented t he sanguine expecta-
tions of a fond owner r at her t han anything t ha t can be called
a businesslike or reasonable estimate of value. That , no doubt,
is a circumstance which at first sight calls for observation ; but
when t he facts of t h e case and t he position of t he parties are
considered, it is difficult to see what bearing it has on t he
question before your Lordships. The purchase-money was
paid in this way : as money came in, sums amounting in all to
30,000?. were paid to Mr. Salomon, and t hen immediately
returned to t he company in exchange for, fully-paid shares.
The sum of 10,000?. was paid in debentures for t he like amount.
The balance, with t he exception of about 1000?. which Mr.
Salomon seems to have received and retained, went in discharge
of t he debts and liabilities of t he business at t h e t i me of t h e
transfer, which were t hus entirely wiped off. In t he result,
therefore, Mr. Salomon received for his business about 1000?.
in cash, 10,000?. in debentures, and half t he nominal capital of
t he company in fully paid shares for what they were wort h.
No other shares were issued except t he seven shares taken by
t he subscribers to t he memorandum, who, of course, knew all
t he circumstances, and had therefore no ground for complaint
on t he score of overvaluation.
The company had a brief car eer : it fell upon evil days.
Shortly after it was started there seems to have come a period
of great depression in t he boot and shoe trade. There were
strikes of workmen too ; and in view of t ha t danger contracts
with public bodies, which were t he principal source of Mr.
Salomon's profit, were split up and divided between different
firms. The attempts made to push t he business on behalf of
t he new company crammed its warehouses with unsaleable
stock. Mr. Salomon seems to have done what he could : both
he and his wife lent t he company money ; and then he got his
debentures cancelled and reissued to a Mr. Broderip, who
advanced him 5000?., which he immediately handed over to
t he company on loan. The temporary relief only hastened
A. C. 1897. 3 E
H . L . (E.)
1896
S AL O M O N
V.
SALOMON
&Co.
SALOMON
&Co.
V.
S AL O M O N .
Lord
Macnaghten.
50
HOUSE OF LORDS
[1897]
H . L . ( E. )
1896
SALOMON
v.
SALOMON
&Co .
SALOMON
&Co .
v.
S AL O MO N .
Lord
Macuaghten.
ruin. Mr. Broderip's interest was not paid when it became
due. He took proceedings at once and got a receiver appointed.
Then, of course, came liquidation and a forced sale of t he
company's assets. They realized enough to pay Mr. Broderip,
but not enough to pay t he debentures in full; and t he unsecured
creditors were consequently left out in t he cold.
In this state of things t he liquidator met Mr. Broderip's
claim by a counter-claim, to which he made Mr. Salomon a
defendant. He disputed t he validity of t he debentures on t he
ground of fraud. On the same ground he claimed rescission of
t he agreement for t he transfer of t he business, cancellation of
t he debentures, and repayment by Mr. Salomon of t he balance
of t he purchase-money. In t he alternative, he claimed payment
of 20,000?. on Mr. Salomon's shares, alleging t ha t nothing had
been paid on them.
When t he trial came on before Vaughan Williams J. , t he
validity of Mr. Broderip's claim was admitted, and it was not
disputed t hat t he 20,000 shares were fully paid up. The case
presented by t he liquidator broke down completely; but t he
learned judge suggested t hat t he company had a ri ght of
indemnity against Mr. Salomon. The signatories of t he memo-
randum of association were, he said, mere nominees of Mr.
Salomonmere dummies. The company was Mr. Salomon in
another form. He used t he name of t he company as an alias.
He employed t he company as his a ge nt ; so t he company, he
thought, was entitled to indemnity against its principal. The
counter-claim was accordingly amended to raise this p o i n t ; and
on t he amendment being made t he learned judge pronounced
an order in accordance wi t h t h e view he had expressed.
The order of t he learned judge appears to me to be founded
on a misconception of t he scope and effect of t he Companies
Act, 1862. In order to form a company limited by shares, t he
Act requires t ha t a memorandum of association should be
signed by seven persons, who are each to take one share at
least. If those conditions are complied with, what can it
mat t er whether t h e signatories are relations or st r anger s?
There is nothing in t he Act requiring t ha t t he subscribers to
t he memorandum should be independent or unconnected, or
A. c;
AND PRIVY COUNCIL.
51
t hat they or any one of t hem should take a substantial interest
in t he undertaking, or t ha t they should have a mind and will
of their own, as one of t he learned Lords Justices seems to
think, or t ha t there should be anything like a balance of power
in t he constitution of t he company. In almost every company
t hat is formed t he statutory number is eked out by clerks or
friends, who sign their names at t he request of t he promoter
or promoters without intending to take any further par t or
interest in t he mat t er .
When t he memorandum is duly signed and registered, though
there be only seven shares taken, t he subscribers are a body
corporate " capable forthwith, " to use t he words of t he enact-
ment , " of exercising all t h e functions of an incorporated com-
pany. " Those are strong words. The company at t ai ns mat uri t y
on its bi rt h. There is no period of minorityno interval of
incapacity. I cannot understand how a body corporate t hus
made " capable " by st at ut e can lose its individuality by issuing
t h e bulk of i t s capital to one person, whether he be a sub-
scriber to t he memorandum or not . The company is at law a
different person altogether from t he subscribers to t he memo-
randum ; and, though it may be t ha t after incorporation t he
business is precisely t he same as it was before, and t he same
persons are managers, and t he same hands receive t he profits,
the company is not in law t he agent of t he subscribers or
trustee for t hem. Nor are t he subscribers as members liable,
in any shape or form, except to t he extent and in t he manner
provided by t he Act. Tha t is, I t hi nk, t he declared intention
of t he enactment. If t he view of t he learned judge were
sound, it would follow t hat no common law partnership could
register as a company limited by shares without remaining
subject to unlimited liability.
Mr. Salomon appealed; but his appeal was dismissed with
costs, though t he Appellate Court did not.entirely accept t he
view of t he Court below. The decision of t h e Court of Appeal
proceeds on a declaration of opinion embodied in t he order
which has been already read.
I must say t ha t I, too, have great difficulty in understanding
this declaration. If it only means t ha t Mr. Salomon availed
3 E 2
H. L. (E.)
1896
S AL O M O N
V.
S AL O M O N
& C O .
SALOMON
& C O .
v.
S AL O M O N .
Lord
Macnaghten.
52
H. L. (E.)
1896
SALOMON
V.
S AL O MO N
&Co .
SALOMON
&Co .
v.
S AL O MO N .
Lord
Macnagbten.
himself to t he full of t he advantages offered by t he Act of 1862,
what is there wrong in t hat ? Leave out t he words " contrary
to t he t rue i nt ent and meaning of t he Companies Act, 1862,"
and bear in mind t hat " t he creditors of t he company " are not
t he creditors of Mr. Salomon, and t he declaration is perfectly
i nnocent : it has no sting in i t .
In an early case, which in some of its aspects is not unlike
t he present, t he owners of a colliery (to quote t he language of
Giffard L . J. in t he Court of Appeal) " went on working t he
colliery not very successfully, and t hen determined to form a
limited company in order to avoid incurring further personal
liability." " It was, " adds t he Lord Just i ce, " t he policy of t he
Companies Act to enable this to be done." And so he reversed
t he decision of Malins V. -C, who had expressed an opinion
t hat if t he laws of the country sanctioned such a proceeding
they were "i n a most lamentable s t at e, " and had fixed the
former owners with liability for t he amount of t he shares they
took in exchange for their property : In re Baglan Hall Colliery
Co. (1)
Among t he principal reasons which induce persons to form
private companies, as is stated very clearly by Mr. Palmer in
his treatise on t he subject, are t he desire to avoid t he risk of
bankruptcy, and t he increased facility afforded for borrowing
money. By means of a private company, as Mr. Palmer
observes, a trade can be carried on with limited liability, and
without exposing t he persons interested in it in the event ot
failure to t he harsh provisions of t he bankruptcy law. A
company, too, can raise money on debentures, which an ordinary
trader cannot do. Any member of a company, acting in good
faith, is as much entitled to take and hold t he company's
debentures as any outside creditor. Every creditor is entitled
to get and to hold t he best security t he law allows him to
take.
If, however, the declaration of the Court of Appeal means
t ha t Mr. Salomon acted fraudulently or dishonestly, I must say
I can find nothing in the evidence to support such an imputa-
tion. The purpose for which Mr. Salomon and the other
(1) L. R. 5 Ch. 340.
A. C. AND PRIVY COUNCIL.
53
subscribers to t he memorandum were associated was " lawful."
The fact t ha t Mr. Salomon raised 5000?. for t he company on
debentures t ha t belonged to him seems to me strong evidence
of his good faith and of his confidence in t he company. The
unsecured creditors of A. Salomon and Company, Li mi t ed, may
be entitled to sympathy, but they have only themselves to blame
for t hei r misfortunes. They trusted t he company, I suppose,
because t hey had long dealt with Mr. Salomon, and he had
always paid his wa y ; but they had full notice t hat they were
no longer dealing with an individual, and they must be taken
to have been cognisant of t he memorandum and of t he articles
of association. F o r such a catastrophe as has occurred in t hi s
case some would blame t he law t ha t allows t he creation of a
floating charge. Bu t a floating charge is too convenient a form
of security to be lightly abolished. I have long t hought , and I
believe some of your Lordships also t hi nk, t ha t t he ordinary
trade creditors of a trading company ought to have a preferential
claim on t he assets in liquidation in respect of debts incurred
within a certain limited time before t he winding-up. Bu t t ha t
is not t he law at present. Everybody knows t h a t when t here
is a winding-up debenture-holders generally step in and sweep
off everyt hi ng; and a great scandal it is.
It has become t he -fashion to call companies of this class
" one man companies." Tha t is a taking nickname, but it does
not help one much in t he way of argument. If it is intended
to convey t h e meaning t ha t a company which is under t he
absolute control of one person is not a company legally incor-
porated, although the requirements of t he Act of 1862 may have
been complied with, it is inaccurate and misleading: if it merely
means t ha t there is a predominant part ner possessing an over-
whelming influence and entitled practically to t he whole of t he
profits, t here is nothing in t ha t t h a t I can see contrary to t h e
t r ue intention of t he Act of 1862, or against public policy, or
detrimental to t he interests of creditors. If t he shares are fully
paid up, it cannot mat t er whether they are in t he hands of one
or many. If t he shares are not fully paid, it is as easy to gauge
the solvency of an individual as to estimate t he financial ability
of a crowd.
H. L. (E.)
1896
SALOMON
v.
SALOMON
&Co .
SALOMON
&Co .
v.
SALOMON.
Lord
Macnaghtcn.
54
HOUSE OF LORDS [ 1897]
H. L. (E.)
1896
SALOMON
V.
SALOMON
&Co.
SALOMON
&Co.
v.
SALOMON.
Lord
llacnaghtcn.
One argument was addressed to your Lordships which ought
perhaps to be noticed, although it was not t he ground of
decision in either of t he Courts below. It was argued t ha t t h e
agreement for t he transfer of t he business to t he company ought
to be set aside, because there was 'no independent board of
directors, and t he property was transferred at an overvalue.
There are, it seems to me, two answers to t ha t argument. In
t he first place, t he directors did just what they were authorized
to do by t he memorandum of association. There was no fraud
or misrepresentation, and t here was nobody deceived. In t he
second place, t he company have put it out of their power to
restore t he property which was transferred to t hem. It was
said t h a t t he assets were sold by an order made in t he presence
of Mr. Salomon, though not wi t h his consent, which declared
t h a t t he sale was to be without prejudice to t h e ri ght s claimed
by t he company by their counter-claim. I cannot see what
difference t h a t makes. The reservation in t he order seems to
me to be simply nugatory.
I am of opinion t h a t t h e appeal ought to be allowed, and t h e
counter-claim of t h e company dismissed wi t h costs, both here
and below.
LORD MORRIS. My Lor ds, I quite concur in t he judgment
which has been announced, and in t he reasons which have been
so fully given for i t .
. LORD DAVEY. My Lords, i t is possible, and (I think) pro-
bable, t ha t t he conclusion to which I feel constrained to come
in t hi s case may not have been contemplated by t he Legislature,
and may be due to some defect in t he machinery of t he Act.
Bu t , after all, t he intention of t he Legislature must be collected
from t he language of its enactments ; and I do not see my way
to holding t ha t if there are seven registered members t he
association is not a company formed in compliance with t he
provisions of t he Act and capable of carrying on business wi t h
limited liability, either because t he bulk of t he shares are held
by some only, or even one of t he members, and t he others are
what is called " dummies," holding, it may be, only one share
A. C. AND PRIVY CO U N CIL .
55
of 1?. each, or because there are less t han seven persons who
are beneficially entitled to t he shares.
I think t ha t this result follows from t he absence of any
provision fixing a minimum nominal amount of a sharethe
provision in s. 8 t hat no subscriber shall take less t han one
share, and t he provision in s. 30 t ha t no notice of any t r ust
shall be entered on t he register. Wi t h regard to t he latter
provision, it would, in my opinion, be impossible to work t he
machinery of t he Act on any other principle, and to at t empt to
do so would lead only to confusion and uncertainty. The
learned counsel for t he respondents (wisely, as I think) did not
lay any stress on t he members, other t han t h e appellant, being
trustees for him of t hei r shares. Their argument was t ha t they
were " dummies," and did not hold a substantial interest in t he
company, i.e., what a jury would say is a substantial interest.
In t he language of some of t he judges in t he Court below, any
jury, if asked t he question, would say t he business was Aron
Salomon's and no one else's.
It was not argued in this case t h a t there was no association
of seven persons to be registered, and t he registration therefore
operated nothing, or t ha t t he so-called company was a sham
and mi ght be disregarded; and, indeed, it would have been
difficult for t he learned counsel for -the respondents, appearing,
as they did, at your Lordshi ps' Bar for t he company, who had
been permitted to litigate in t h e Courts below as actors (on
their counter-claim), to contend t ha t their clients were non-
existent. I do not say t hat such an argument ought to or
would pr evai l ; I only observe t hat , having regard to t he
decisions, it is not certain t ha t s. 18, making t he certificate of
t he registrar conclusive evidence t ha t all t he requisitions of t he
Act in respect of registration had been complied with, would
be an answer to i t .
We st art , t hen, with t he assumption t hat t he respondents
have a corporate existence with power to sue and be sued,
to incur debts and be wound up, and to act as agents or as
trustees, and I suppose, therefore, to hold property. Bot h t he
Courts below have, however, held t hat t he appellant is liable to
indemnify t he company against all its debts and liabilities.
H. L. (E.)
1896
SALOMON
v.
SALOMON
&Co.
SALOMON
&Co.
v.
SALOMON.
Lord Davoy.
56
H O U S E O F L O R D S [ 1897]
II. L. ( E. )
1896
SALOMON
V,
SALOMON
&Co .
SALOMON
&Co.
.
SALOMON.
Lord Davoy.
Vaughan Williams J. held t hat the company was an " alias "
for t he appellant, who carried on his business through t he
company as his agent, and t ha t he was bound to indemnify his
own agent ; and he arrived at this conclusion on t he ground
t hat t he other members of t he company had no substantial
interest in it, and t he business in substance was t he appellant's.
The Court of Appeal thought t he relation of t he company to
t he appellant was t hat of trustee to cestui que t rust .
The ground on which t he learned judges seem to have chiefly
relied was t hat it was an at t empt by an individual to carry on
his business with limited liability, which was forbidden by t he
Act and unlawful. I observe, in passing, t hat nothing t urns
upon there being only one person interested. The argument
would have been just as good if there had been six members
holding t he bulk of t he shares and one member with a very
small interest, say, one share. I am at a loss to see how in
either view taken in t he Courts below t he conclusion follows
from t he premises, or in what way t he company became an
agent or trustee for t he appellant, except in the sense in which
every company may loosely and inaccurately be said to be an
agent for earning profits for its members, or a trustee of its
profits for t he members amongst whom they are to be divided.
There was certainly no express t rust for t he appellant; and an
implied or constructive t rust can only be raised by virtue of
some equity. I took t he liberty of asking t he learned counsel
what t he equity was, but got no answer. By an " alias " is
usually understood a second name for one individual; but here,
as one of your Lordships has already observed, we have, ex
hypothesi, a duly formed legal persona, with corporate at t ri -
butes and capable of incurring legal liabilities. Nor do I think
it legitimate to inquire whether t he interest of any member is
substantial when t he Act has declared t ha t no member need
hold more t han one share, and has not prescribed any minimum
amount of a share. If, as was said in t he Court of Appeal, t he
company was formed for an unlawful purpose, or in order to
achieve an object not permitted by t he provisions of t he Act,
t he appropriate remedy (if any) would seem to be to set aside
t he certificate of incorporation, or to treat t he company as a
A. C.
AND PRIVY COUNCIL.
57
nullity, or, if t he appellant has committed a fraud or mis-
demeanour (which I do not t hi nk ho has), he may be proceeded
against civilly or criminally; but how either of those states
of circumstances creates t he relation of cestui que t r ust and
trustee, or principal and agent, between t he appellant and
respondents, is not apparent to my understanding.
I am, therefore, of opinion t h a t t h e order appealed from
cannot be supported on t he grounds stated by t h e learned
judges.
Bu t Mr. Farwell also relied on t he alternative relief claimed
by his pleadings, which was quite open to him here, namely,
t hat t he contract for purchase of t he appellant's business ought
to be set aside for fraud. The fraud seems to consist in t he
alleged exorbitance of t he price and t he fact t ha t there was no
independent board of directors wi t h whom t h e appellant could
contract. I am of opinion t hat t he fraud was not made out.
I do not t hi nk t he price of t he appellant's business (which
seems to have been a genuine one, and for some time a pros-
perous business) was so excessive as to afford grounds for
rescission; and as regards t h e cash portion of t he price, it must
be observed t hat , as t he appellant held t he bulk of t he shares,
or (the respondents say) was t he only shareholder, t he money
required for t he payment of it came from himself in t he form
either of calls on his shares or profits which would otherwise
be divisible. Nor was t he absence of any independent board
material in a case like t he present. I t hi nk it an inevitable
inference from t he circumstances of t he case t hat every member
of t he company assented to t he purchase, and t he company is
bound in a mat t er i nt r a vires by t he unanimous agreement
of i t s members. In fact, it is impossible to say who was
defrauded.
Mr. Farwell relied on some dicta in Erlanger v. New Sombrero
Phosphate Co. (1), a case which is often quoted and not infre-
quently misunderstood. Of course, Lord Cairns' observations
were directed only to a case such as he had before him, where it
was attempted to bind a large body of shareholders by a contract
which purported to have been made between t he vendor and
(1) 3 App. Cas. 1218,1236.
H. L. (E.)
1896
><~ >
SALOMON
v,
SALOMON
&CO.
SALOMON
&Co .
v.
SALOMON.
Lord Davey.
58
H. L. (E.)
1896
SALOMON
v.
SALOMON
&Co.
SALOMON
&Co.
V.
SALOMON.
Lord Davey.
directors before t he shares were offered for subscription;
whereas it appeared t ha t t he directors were only t he nominees
of t he vendor, who had accepted his bidding and exercised no
judgment of their own. It has nothing to do wi t h t h e present
case. That a company may contract with t he holder of t he
bulk of its shares, and such contract will be binding though
carried by t he votes of t ha t shareholder, was decided in North-
West Transportation Co. v. Beatty. (1)
For these reasons, I am of opinion t ha t t he appellant's appeal
should be allowed and t he cross-appeal should be dismissed. I
agree to t he proposed order as to costs.
Order of the Court of Appeal reversed and cross-
appeal dismissed with costs here and below ;
the costs m this House to be taxed m the
manner usual when the appellant sues in
formd pauperis ; cause remitted to the Chan-
cery Division.
Lords' Journals, November 16, 1896.
Solicitors for appel l ant : Ralph Raphael & Co.
Solicitors for respondents: S. M. do J. B. Benso7i.
(1) 12 App. Cas. 589.

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