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Salomon v Salomon & Co, Ltd; Salomon & Co, Ltd v Salomon

All ER Reprints/[1895-9] All ER Rep /Salomon v Salomon & Co, Ltd; Salomon & Co,
Ltd v Salomon – [1895-99] All ER Rep 33

Salomon v Salomon & Co, Ltd; Salomon & Co, Ltd v Salomon

[1895-99] All ER Rep 33

Also reported [1897] AC 22; 66 LJ Ch 35; 75 LT 426;45 WR 193; 13 TLR 46;41 Sol
Jo 63; 4 Mann 89


Lord Halsbury LC, Lord Watson, Lord Herschell, Lord Macnaghten, Lord Morris and
Lord Davey

15, 22, 29 June 1896

16 November 1896

Company – Legal position – Legal entity separate and distinct from its members -
“One-man” company – Legality – Irrelevance of motive for promotion – Company not
agent of, or trustee for shareholders.

A company which has complied with the requirements relating to the incorporation
of companies contained in the Companies Acts is a legal entity separate and
distinct from the individual members of the company. It matters not that all the
shares in the company are held by one person, excepting one share each held by
the persons who, as required by the Acts, have subscribed their names to the
memorandum of association to enable the company legally to be formed, nor does
it matter that those persons are merely the nominees of the principal
shareholder. Once a company has been legally incorporated it must be treated
like any other independent person with rights and liabilities appropriate to
itself, and the motives of those who promote the company (eg, to enable them to
trade with the benefit of limited liability) are absolutely irrelevant in
discussing what those rights and liabilities are. A company is not the agent of
the shareholders to carry on their business for them, nor in it the trustee for
them of their property.

Decision of the Court of Appeal, [1895] 2 Ch 328, reversed.


The Companies Act, 1862, was repealed by the Companies (Consolidation) Act,
1908. The statute now in force is the Companies Act, 1948 (3 HALSBURY’S STATUTES
(2nd Edn) 452). Where provisions of the 1862 Act are mentioned in their
Lordships’ opinions (infra) the corresponding sections of the Act of 1948 are
indicated. Two or more persons can now forma private company.

Considered: Re Wragg, post;[1897] 1 Ch 796; Re Hirth, Ex parte Trustee,[1899] 1
QB 612; Lagunas Nitrate Co v Lagunas Syndicate,[1899] 2 Ch 392; Gramophone and
Typewriter, Ltd v Stanley,[1906] 2 KB 856; A-G for Dominion of Canada v Standard
Trust Co of New York,[1911] AC 498. Applied: Booth v Helliwell, [1914] 3 KB 252;
British Thomson-Houston Co, Ltd v Sterling Accessories, Ltd, Same v Crowther and
Osborn, Ltd,[1924] All ER Rep 294. Considered: Smith, Stone and Knight, Ltd v
Birmingham Corpn,[1939] 4 All ER 116. Applied: Lee v Lee’s Air Farming, Ltd
,[1960] 3 All ER 420. Referred to: Seligman v Prince, [1895] 2 Ch 617;
Munkittrick v Perryman and Hands (1896) 74 LT 149; Hadley v Hadley (1897) 77 LT
131; R v Grubb, [1914-15] All LR Rep 667; Daimler Co, Ltd v Continental Tyre and
Rubber Co (Great Britain) Ltd,[1916-17] All ER Rep 191; Re Express Engineering
Works,[1920] 1 Ch 466; IR Comrs v Sansom, [1921] 2 KB 492; Re Fasey, Ex parte
Trustees,[1923] 2 Ch 1; Parker and Cooper, Ltd v Reading, [1926] All ER, Rep
323; Thomas v Evans, Jones v South-West Lancashire Coal-Owners’ Association
(1926) 42 TLR 401; Colville Estate, Ltd v IR Comrs,[1930] All ER Rep 770; EBM Co
v Dominion Book,[1937] 3 All ER 555; R v South Wales Traffic Licensing Authority
, Ex parte Ebbw Vale UDC,[1951] 1 All ER 806; Bank Voor Handel In Scheepvaart v
Slatford, [1951] 2 All ER 779; Pegler v Craven,[1952] 1 All ER 685.

As to the legal position of a company, see 6 HALSBURY’S LAWS (3rd Edn) 11; and
for cases See 9 DIGEST (Repl,) 28 et seq.

[1895-99] All ER Rep 33 at  34

Cases referred to:

(1) Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218; 39 LT 269; 27
WR 65; sub nom New Sombrero Phosphate Co v Erlanger, 48 LJ Ch 73, HL; 9
Digest (Repl) 41, 75.

(2) Re Baglan Hall Colliery Co (1870) 5 ChApp 346; 39 LJ Ch 591; 23 LT 60; 18
WR 499, LJ; 9 Digest (Repl) 90, 399.

(3) North-West Transportation Co v Beatty (1887) 12 App Cas 589; 56 LJPC 102;
57 LT 426; 36 WR 647; 3 TLR 789, PC; 9 Digest (Repl) 485, 3188.
Also referred to in argument:

Re National Debenture and Assets Corpn, [1891] 2 Ch 505; 60 LJ Ch 533; 64 LT
512; 39 WR 707; 7 TLR 485, CA; 11 Digest (Repl) 81, 338.

Re G Newman & Co, [1895] 1 Ch 674; 64 LJ Ch 407; 72 LT 697; 43 WR 483; 11 TLR
292; 39 Sol Jo 346; 2 Mans 267; 12 R 228, CA; 9 Digest (Repl) 179, 1158.

Farrar v Farrars, Ltd (1888) 40 Ch D 395; 58 LJ Ch 185; 60 LT 121; 37 WR 196;
5 TLR 164, CA; 9 Digest (Repl) 29, 9.

Re Ambrose Lake Tin and Copper Mining Co, Ex party Taylor, Ex parte Moss
(1880) 14 Ch D 390; 49 LJ Ch 457; 42 LT 604; 28 WR 783, CA; 9 Digest (Repl)
54, 168.

Re British Seamless Paper Box Co (1881) 17 Ch D 467; 50 LJ Ch 497; 44 LT 498;
29 WR 690, CA; 9 Digest (Repl) 515, 3390.

R v Arnaud (1846) 9 QB 806; 16 LJQB 50; 8 LTOS 212; 10 JP 821; 11 Jur 279;
115 ER 1485; 13 Digest (Repl) 286, 1055.

Re Cowen, Ex parte Cowen (1867) 2 ChApp 563; 16 LT 469; 15 WR 859, LJJ; 5
Digest (Repl) 1201, 9668.

Re Smith, Ex parte Hepburn (1890) 25 QBD 536; 59 LJQB 554; 63 LT 621; 38 WR
744; 6 TLR 422; 7 Morr 246, CA; 5 Digest (Repl) 1025, 8293.

Adam v Newbigging (1888) 13 App Cas 308; 57 LJ Ch 1066; 59 LT 267; 37 WR 97,
HL; 35 Digest 77, 754.

Clarke v Dickson (1858) EB & E 148; 27 LJQB 223; 31 LTOS 97; 4 Jur NS 832;
120 ER 463; 35 Digest 76, 742.0

Western Bank of Scotland v Addie, Addie v Western Bank of Scotland (1867) LR
1 Sc & Div 145, HL; 9 Digest (Repl) 119, 617.

Cross-Appeals from a decision of the Court of Appeal (LINDLEY, LOPES, and KAY,
LJJ) reported [1895] 2 Ch 323, affirming an order of VAUGHAN WILLIAMS, J.

The appellant, Aron Salomon, had for some thirty years prior to 1892 carried on
business as a leather merchant and hide factor and wholesale and export boot
manufacturer under the style of A Salomon & Co. A limited company was formed in
1892 to carry on the business, the subscribers to the memorandum of association
being the appellant, his wife and daughter, and his four sons. The nominal
capital of the company was 40,000 pounds, divided into 1 pound shares; 20,007
shares were issued, of which the appellant held 20,001, the other signatories of
the memorandum of association holding one share each. The appellant’s business
was sold to the company for 38,782 pounds, of which 16,000 pounds was to be paid
in cash or debentures, and at the first meeting of the directors, who consisted
of the appellant and two of his sons, it was resolved to pay the appellant 6,000
pounds in cash and 10,000 pounds is debentures. These debentures were afterwards
mortgaged by the appellant to one Edmund Broderip as a security for an advance
of 5,000 pounds, but eventually they were cancelled, and 10,000 pounds fresh
debentures were issued to Edmund Broderip. In October 1898, an order was made
for the winding-up of the company, at which date the company was indebted to
unsecured creditors other than Aron Salomon to the amount of 7,773 pounds. An
action was brought by the liquidator of the company against the appellant, which
was tried before VAUGHAN WILLIAMS, J, who declared that the

[1895-99] All ER Rep 33 at  35

company were entitled to be indemnified by the appellant to the amount of 7,733
pounds. This decision was affirmed by the Court of Appeal as above mentioned.
The company brought a cross-appeal against an order of the Court of Appeal on a
counterclaim filed by the company asking for rescission of the contract.

Cohen, QC, Buckley, QC, McCall, QC, and Muir Mackenzie for the appellant.

Farwell, QC, and Theobald for the respondent company.

16 Nov 1896. Their Lordships took time for consideration.


The important question in this case, and I am not certain that it is not the
only question, is whether the respondent company was a company at all – whether,
in truth, that artificial creation of the legislature had been validly
constituted in this instance; and, in order to determine that question, it is
necessary to look at what the statute itself has determined in that respect. I
have no right to add to the requirements of the statute, nor to take from the
requirements thus enacted. The sole guide must be the statute itself.

That there were seven actual living persons who held shares in the company has
not been doubted [see Companies Act, 1948, s 1, which provides for the formation
of a company by seven persons]. As to the proportionate amounts held by each I
will deal with them presently; but it is important to observe that this first
condition of the statute is satisfied, and it follows as a consequence that it
would not be competent to anyone, and certainly not to these persons themselves,
to deny that they were shareholders. I must pause here to point out that the
statute enacts nothing as to the extent or degree of interest which may be held
by each of the seven, or as to the proportion of interest or influence possessed
by one or the majority of the shareholders over the others. One share is enough.
Still less is it possible to contend that the motive of becoming shareholder, or
of making them shareholders, is a field of inquiry which the statute itself
recognises as legitimate. If they are shareholders they are shareholders for all
purposes, and, even if the statute was silent as to the recognition of trusts, I
should be prepared to hold that if six of them were the cestuis que trust of the
seventh, whatever might be their rights inter se, the statute would have made
them shareholders to all intents and purposes with their respective rights and

Dealing with them in their relation to the company, the only relation which I
believe the law would sanction would be that they were corporators of the
corporate body. I am simply here dealing with the provisions of the statute, and
it seems to me to be essential to the artificial creation that the law should
recognise only that artificial existence, quite apart from the motives or
conduct of individual corporators. In saying this I do not at all mean to
suggest that if it could be established that this provision of the statute to
which I am adverting had not been complied with, you could not go behind the
certificate of incorporation to show that a fraud had been committed upon the
officer intrusted with the duty of giving the certificate, and that by some
proceeding in the nature scire facias you could not prove the fact that the
company had no legal existence. But, short of such proof, it seems to me
impossible to dispute that once the company is legally incorporated it must be
treated like any other independent person with rights and liabilities
appropriate to itself, and that the motives of those who took part in the
promotion of the company are absolutely irrelevant in discussing what those
rights and liabilities are.

I will, for the sake of argument, assume the proposition that the Court of
Appeal lays down, that the formation of the company was a mere scheme to enable
Aron Salomon to carry on business in the name of the company. I am wholly unable
to follow the proposition that this was contrary to the true intent and meaning
of the Companies Act. I can only find the true intent and meaning of the Act
from the Act itself, and the Act appears to me to give a company a legal
existence with, as I have said, rights and liabilities of its own, whatever may
have been the ideas

[1895-99] All ER Rep 33 at  36

or schemes of those who brought it into existence. I observe that VAUGHAN
WILLIAMS, J, held that the business was Mr Salomon’s business and no one else’s,
and that he chose to employ as agent a limited company, and he proceeded to
argue that he was employing that limited company as agent, and that he was bound
to indemnify that agent – the company. I confess it seems to me that that very
learned judge becomes involved by this argument in a very singular
contradiction. Hither the limited company was a legal entity or it was not. If
it was, the business belonged to it and not to Mr Salomon; if it was not, there
was no person and nothing to be an agent at all; and it in impossible to say at
the same time that there is a company and there is not. LINDLEY, LJ, on the
other hand, affirms that there were seven members of the company, but, he says,
it is manifest that six of them were members simply in order to enable the
seventh himself to carry on business with limited liability, so that the object
of the whole arrangement was to do the very thing which the legislature intended
not to be done.

It is obvious to inquire where is that intention of the legislature manifested
in the statute? Even if we were at liberty to insert words to manifest that
intention, I should have great difficulty in ascertaining what the exact
intention thus imputed to the legislature is or was. In this particular case it
is the members of one family that represent all the shares; but if the supposed
intention is not limited to so narrow a proposition as this, that the seven
members must not be members of one family, to what extent may influence or
authority or intentional purchase of a majority among the shareholders be
carried so as to bring it within the supposed prohibition? It is, of course,
easy to say that it was contrary to the intention of the legislature – a
proposition which, by reason of its generality, it is difficult to bring to the
test; but when one seeks to put as an affirmative proposition what the thing is
which the legislature has prohibited, there is, as it appears to me, an
insuperable difficulty in the way of those who seek to insert by construction
such a prohibition into the statute.

As one mode of testing the proposition it would be pertinent to ask whether two
or three, or, indeed, all seven, may constitute the whole of the shareholders.
Whether they must be all independent of each other in the sense of each having
an independent beneficial interest – and this is a question that cannot be
answered by the reply that it is a matter of degree. If the legislature intended
to prohibit something, you ought to know what that something is. All it has said
is that one share is sufficient to constitute a shareholder, though the shares
may be 100,000 in number. Where am I to get from the statute itself a limitation
of that provision that that shareholder must be an independent and beneficially
interested person? I find all through the judgment of the Court of Appeal a
repetition of the same proposition to which I have already adverted – that the
business was the business of Aron Salomon, and that the company is variously
described as a myth and a fiction. LOPES, LJ, says:

“The Act contemplated the incorporation of seven independent bona fide
members, who had a mind and a will of their own, and were not the mere
puppets of an individual who, adopting the machinery of the Act,
carried on his old business in the same way as before, when he was a
sole trader.”

The words “seven independent bona fide members with a mind and will of their own
and not the puppets of an individual” are by construction to be read into the
Act LOPES, LJ, also said that the company was a mere nominis umbra. KAY, LJ,

“The statutes were intended to allow seven or more persons bona fide
associated for the purpose of trade to limit their liability under
certain conditions and to become a corporation. But they were not
intended to legalise a pretended association for the purpose of
enabling an individual to carry on his own business with limited
liability in the name of a joint-stock company.”

[1895-99] All ER Rep 33 at  37

The learned judges appear to me not to have been absolutely certain in
their own minds whether to treat the company as a real thing or not.
If it was a real thing, if it had a legal existence, and if,
consequently, the law attributed to it certain rights and liabilities
in its constitution as a company, it appears to me to follow as a
consequence that it is impossible to deny the validity of the
transactions into which it has entered. VAUGHAN WILLIAMS, J, appears
to me to have disposed of the argument that the company, which for
this purpose he assumed to be a legal entity, was defrauded into the
purchase of Aron Salomon’s business, because, assuming that the price
paid for the business was an exorbitant one as to which I am myself
not satisfied, but assuming that it was, the learned judge most
cogently observes that when all the shareholders are perfectly
cognisant of the conditions under which the company is formed and the
conditions of the purchase, it is impossible to contend that the
company is being defrauded. The proposition laid down in Erlanger v
New Sombrero Phosphate Co (1) – I quote the headnote – is, that

“Persons who purchase property and then create a company to purchase
from them the property they posses, stand in a fiduciary position
towards that company, and must faithfully state to the company the
facts which apply to the property, and would influence the company in
deciding on the reasonableness of acquiring it.”

But if every member of the company, every shareholder, knows exactly what is the
true state of the facts, which for this purpose must be assumed to be the case
here, VAUGHAN WILLIAMS, J’s, conclusion seems to me to be inevitable – that no
case of fraud upon the company could here be established.

If there was no fraud and no agency, and if the company was a real one and not a
fiction or a myth, every one of the grounds upon which it is sought to support
the judgment is disposed of. The truth is that the learned judges have never
allowed in their own minds the proposition that the company has a real
existence. They have been struck by what they have considered the inexpediency
of permitting one man to be, in influence and authority, the whole company, and
assuming that such a thing could not have been intended by the legislature, they
have sought various grounds upon which they might insert into the Act some
prohibition of such a result. Whether such a result be right or wrong, politic
or impolitic, I say, with the utmost deference to the learned judges, that we
have nothing to do with that question if this company has been duly constituted
by law, and, whatever may be the motives of those who constitute it, I must
decline to insert into that Act of Parliament limitations which are not to be
found there.

I have dealt with this matter upon the narrow hypothesis propounded by the
learned judges below, but it is, I think, only justice to the appellant to say
that I see nothing whatever to justify the imputations which are implied in some
of the observations made by more than one of the learned judges. The appellant,
in my opinion, is not shown to have done, or to have intended to do, anything
dishonest or unworthy, but to have suffered a great misfortune without any fault
of his own. The result is that I move your Lordships that the judgment appealed
from be reversed, but as this is a pauper case I regret to say it can only be
with such costs in this House as are appropriate to that condition of things,
and that this appeal be dismissed with costs to the same extent.


This appeal raises some questions of practical importance, depending upon the
construction of the Companies Acts, which do not appear to have been settled by
previous decisions. As l am not prepared to accept without reservation all the
conclusions of fact which found favour with the courts below, I shall, before
adverting to the law, state what I conceive to be the material facts established
by the evidence before us.

The appellant, Aron Salomon, for many years carried on business, on his own
account, as a leather merchant and wholesale boot manufacturer. With the design

[1895-99] All ER Rep 33 at  38

of transferring his business to a joint-stock company, which was to consist
exclusively of himself and members of his own family, he, on 20 July 1892,
entered into a preliminary agreement with one Adolph Anholt, as trustee for the
future company, settling the terms upon which the transfer was to be made by
him, one of its conditions being that, in part payment, he was to receive 10,000
pounds in debentures of the company. A memorandum of association was then
executed by the appellant, his wife, a daughter, and four sons, each of them
subscribing for one share, in which the leading object for which the company was
formed was stated to be the adoption and carrying into effect, with such
modifications (if any) as might be agreed on, of the provisional agreement of
July 20. The memorandum was registered on 28 July 1892, and the effect of
registration, if otherwise valid, was to incorporate the company, under the name
of “Aron Salomon & Co, Ltd,” with liability limited by shares, and having a
nominal capital of 40,000 pounds divided into 40,000 shares of 1 pound each.

The company adopted the agreement of July 20, subject to certain modifications
which are not material; and an agreement to that effect was executed between
them and the appellant on 2 August 1892. Within a month or two after that date
the whole stipulations of the agreement were fulfilled by both parties. In terms
thereof, 100 debentures, for 100 pounds each, were issued to the appellant, who,
upon the security of these documents, obtained an advance of 5,000 pounds from
Edmund Broderip. In February 1893, the original debentures were returned to the
company and cancelled, and in lieu thereof, with the consent of the appellant as
beneficial owner, fresh debentures to the same amount were issued to Mr
Broderip, in order to secure the repayment of his loan, with interest at 8 per
cent. In September 1892, the appellant applied for and obtained an allotment of
20,000 shares; and from that date until an order was made for its compulsory
liquidation, the share register of the company remained unaltered, 20,001 shares
being held by the appellant and six shares by his wife and family. It was all
along the intention of these persons to retain the business in their own hands,
and not to permit any outsider to acquire an interest in it.

Default having been made in the payment of interest upon his debentures, Mr
Broderip, in September 1893, instituted an action in order to enforce his
security against the assets of the company. Thereafter a liquidation order was
made and a liquidator appointed, at the instance of unsecured creditors of the
company. It has now been ascertained that, if the amount realised from the
assets of the company were, in the first place, applied in extinction of Mr
Broderip’s debt and interest, there would remain a balance of about 1,055
pounds, which is claimed by the applicant as beneficial owner of the debentures.
In the event of his claim being sustained there will be no funds left for
payment of the unsecured creditors, whose debts amount to 7,333 pounds 8s 6d.
The liquidator lodged a defence in the name of the company, to the debenture
suit, in which he counterclaimed against the appellant (i) to have the
agreements of July 20 and 2 August 1892, rescinded, (ii) to have the debentures
already mentioned delivered up and cancelled, (iii) repayment of all sums paid
by the company to the appellant under these agreements, and (iv) a lien for
these sums upon the business and assets. The averments made in support of these
claims were to the effect that the price paid by the company exceeded the real
value of the business and assets by upwards of 8,200 pounds; that the
arrangements made by the appellant for the formation of the company were a fraud
upon the creditors of the company; that no board of directors of the company was
ever appointed, and that in any case such board consisted entirely of the
appellant, and there never was an independent board.

The case went to proof before VAUGHAN WILLIAMS, J, when the liquidator was
examined as a witness on behalf of the company, while evidence was given for the
appellant by himself and by his son, Emanuel Salomon, one of the members of the
company, who had been employed in the business for nearly twenty years. The
evidence shows that before its transfer to the new company the business had been

[1895-99] All ER Rep 33 at  39

prosperous, and had yielded to the appellant annual profits sufficient to
maintain himself and family and to add to his capital. It also shows that, at
the date of the transfer, the business was perfectly solvent. The liquidator,
whose testimony was chiefly directed toward proving that the price paid by the
company was excessive, admitted in cross-examination that the business when
transferred to the company was in a sound condition, and that there was a
substantial surplus. No evidence was led tending to support the allegation that
no board of directors was ever appointed, or that the board consisted entirely
of the appellant. The non-success and ultimate insolvency of the business, after
it came into the hands of the company, was attributed by the witness Emanuel
Salomon to a succession of strikes in the boot trade, and there is not a tittle
of evidence tending to modify or contradict his statement. I think it also
appears from the evidence that all the members of the company were fully
cognisant of the terms of the agreements of July 20 and 2 August 1892, and that
they were willing to accept and did accept those terms. The case was heard
before the learned judge who, at the close of the argument, announced that he
was not prepared to grant the relief craved by the company. He at the same time
suggested that a different remedy might be open to the company, and, on the
motion of their counsel, he allowed the counterclaim to be amended.

In conformity with the suggestion thus made by the Bench, a new and alternative
claim was added for (i) a declaration that the appellant is liable to indemnify
the company against the whole of their unsecured debts, (ii) judgment against
him for 7,733 pounds 8s 3d, being the amount of these debts, and (iii) a lien
for that amount upon all sums which might be payable to the appellant by the
company, in respect of his debentures or otherwise, until the judgment was
satisfied. There were also added averments to the effect that the company was
formed by the appellant and that the debentures for 10,000 pounds were issued in
order that he might carry on the business and take all the profits without risk
to himself, and also that the company was the “mere nominee and agent” of the
appellant. The allegations of the company, in so far as they have any relation
to the amended claim, their pith consisting in the averments made on amendment,
were meant to convey a charge of fraud, and it is unfortunate that they are
framed in such loose and general terms. A relevant charge of fraud ought to
disclose the specific facts necessitating the inference that a fraud was
perpetrated upon some person specified. Whether it was a fraud upon the company
and its members, or upon persons who had dealings with the company, is not
indicated, although there may be very different considerations applicable to
those two cases.

The res gestae which might imply that it was the appellant, and not the company,
who actually carried on its business are not set forth. Any person who holds a
preponderating share in the stock of a limited company has necessarily the
intention of taking the lion’s share of its profits, without any risk beyond
loss of the money which he has paid for or is liable to pay upon his shares, and
the fact of his acquiring and holding debentures secured upon the assets of the
company does not diminish that risk. What is meant by the assertion that the
company “was the mere nominee or agent” of the appellant, I cannot gather from
the record, and I am not sure I understand precisely in what sense it was
interpreted by the learned judges whose decisions we have to consider. No
additional proof was given after the amendment of the counterclaim. The oral
testimony has very little, if any, bearing upon the second claim; and any
material facts relating to the fraudulent objects which the appellant is said to
have had in view, and the alleged position of the company as his nominee or
agent, must be mere matter of inference derived from the agreements of July 20
and 2 August 1892, the memorandum and articles of association, and the
minute-book of the company.

On re-hearing the case VAUGHAN WILLIAMS, J, without disposing of the original
claim, gave the company decree of indemnity in terms of their amended claim. I
do not profess my ability to follow accurately the whole chain of reasoning by

[1895-99] All ER Rep 33 at  40

the learned judge arrived at that conclusion, but he appears to have proceeded
mainly upon the ground that the appellant was in truth the company, the other
members being either his trustees or mere “dummies,” and, consequently, that the
appellant carried on what was truly his own business under cover of the name of
the company, which was nothing more than an alias for Aron Salomon. On appeal
from his decision the Court of Appeal made an order finding it unnecessary to
deal with the original claim, and dismissing the appeal in so far as it related
to the amended claim. The ratio upon which that affirmance proceeded, as
embodied in the order, was:”This court, being of opinion that the formation of
the company, the agreement of August 1892, and the issue of debentures to Aron
Salomon pursuant to such agreement, were a mere scheme to enable him to carry on
business in the name of the company, with limited liability, contrary to the
intent and meaning of the Companies Act, 1862, and, further, to enable him to
obtain a preference over other creditors of the company by procuring a first
charge on the assets of the company by means of such debentures …”

The opinions delivered by the lords justices are strictly in keeping with the
reasons assigned in their order. LINDLEY, LJ, after observing “that the
incorporation of the company cannot be disputed,” refers to the scheme of the
formation of the company, and says, “the object of the whole arrangement is to
do the very thing which the legislature intended not to be done”; and be adds
that “Mr Salomon’s scheme is a device to defraud creditors.” Assuming that the
company was well incorporated in terms of the Act of 1862, an assumption upon
which the decisions appealed from appear to me to throw considerable doubt, I
think it expedient before considering the amended claim, to deal with the
original claim for rescission, which was strongly pressed upon us by counsel for
the company, under their cross-appeal. Upon that branch of the case there does
not appear to me to be much room for doubt. With the exception that the word
“exorbitant” appears to me to be too strong an epithet I entirely agree with
VAUGHAN WILLIAMS, J, when he says:

“I do not think that when you have a private company, and all the
share holders in the company are perfectly cognisant of the conditions
under which the company is formed, and the conditions of the purchase
by the company, you can possibly say that purchasing at an exorbitant
price (and I have no doubt whatever that the purchase here was at an
exorbitant price) is a fraud upon those shareholders or upon the

The learned judge goes on to say that the circumstances might have amounted to
fraud if there had been an intention on the part of the original shareholders
“to allot further shares at a later period to future allottees.” Upon that point
I do not find it necessary to express any opinion, because it is not raised by
the facts of the case, and, in my view, these considerations are of no relevancy
in a question as to rescission between the company and the appellant.

Counsel for the company argued that the agreement of August 2 ought to be set
aside, upon the principle followed by this House in Erlanger v New Sombrero
Phosphate Co (1). In that case the vendor, who got up the company, with the view
of selling his adventure to it, attracted shareholders by a prospectus which was
essentially false. The directors, who were virtually his nominees, purchased
from him without being aware of the real facts; and on their assurance that in
so far as they knew, all was right the shareholders sanctioned the transaction.
The fraud by which the company and its shareholders had been misled was directly
traceable to the vendor; and the transaction was set aside at the instance of
the liquidator, the Lord Chancellor (EARL CAIRNS) expressing a doubt whether,
even in those circumstances, the remedy was not too late, after a liquidation
order. But in the present case the agreement of July 20 was in the full
knowledge of the facts, approved and adopted by the company itself, if there was
a company, and by all the shareholders who ever were or were likely to he
members of the company.

[1895-99] All ER Rep 33 at  41

In my opinion, therefore, Erlanger v New Sombrero Phosphate Co (1) has no
application, and the original claim of the liquidator is not maintainable.

The lords justices, in disposing of the amended claim, have expressly found that
the formation of the company, with limited liability, and the issue of 10,000
pounds worth of its debentures to the appellant, were “contrary to the tree
intent and meaning of the Companies Act, 1862.” I have had great difficulty in
endeavouring to interpret that finding. I am unable to comprehend how a company,
which has been formed contrary to the true intent and meaning of a statute, and
(in the language of LINDLEY, LJ) does the very thing which the legislature
intended not to be done, can yet be hold to have been legally incorporated in
terms of the statute. “Intention of the legislature” is a common, but very
slippery phrase, which, popularly understood, may signify anything from
intention embodied in positive enactment to speculative opinion as to what the
legislature probably world have meant, although there has been an omission to
enact it. In it court of law or equity, what the legislature intended to be done
or not to be done can only be legitimately ascertained from that which it has
chosen to enact, either in express words or by reasonable and necessary
implication. Accordingly, if the words “intent and meaning,” as they occur in
the finding of the Court of Appeal, are used in their proper legal sense, it
follows, in my opinion, that the company has not been well incorporated; that,
there being no legal corporation, there can be no liquidation under the
Companies Acts, and that the counterclaim preferred by its liquidator must fail.
In that 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 the debts incurred by them in the name of
the company. I can conceive that there might be a limited company formed and
registered by a person who had the sole interest in it, the other subscribing
metal, being persons who were his aliases, and having no real existence; and in
that case also (which does not occur here) there would he on legal company and
the real owner of the concern would be liable for its debts to the full extent
of his means.

The provisions of the Act of 1862 which seem to me to have any bearing upon this
point lie within a very narrow compass. Section 6 [Companies Act, 1948, s 1]
provides that any seven or more persons, associated for a lawful impose, such as
the manufacture and sale of boots, may, by subscribing their names to a
memorandum of association and otherwise complying with the provisions of the Act
in respect of registration, form a company with or without limited liability;
and s 8 [s 2(4) (b) of the Act of 1948], which prescribes the essentials of the
memorandum in the case of a company limited by shares, inter alia, enacts that
“no subscriber shall take less than one share.” The first of these enactments
does not require that the persons subscribing shall not be related to each
other, and the second plainly imports that the holding of a single share affords
a sufficient qualification for membership; and I can find no other rule laid
down or even suggested in the Act. Nor does the statute, either expressly or by
implication impose any limit upon the number of shares which a single member may
subscribe for or take by allotment. At the date of registration all the
requirements of the Act had been complied with, and, as matters then stood,
there does not appear to have been any room for the pleas now advanced by the
liquidator. The company was still free to modify or reject the agreement of July
20, and the fraud of which the appellant has been held guilty by the Court of
Appeal, though it may have existed in animo, had not been carried into execution
by the acceptance of the agreement, the issue of debentures to the appellant
under the terms of it, and by his receiving an allotment of shares which
increased has interest in the company to 20001/20007 of its actual capital.

I have already intimated my opinion that the acceptance of the agreement is
binding on the company; and neither that acceptance, nor the preponderating
share of the appellant, nor his payment in debentures, being forbidden by the
Act, I do not think that any of those things, could subsequently render the

[1895-99] All ER Rep 33 at  42

of the company invalid. But I am willing to assume that proceedings which are
permitted by the Act may be so used by the members of a limited company as to
constitute a fraud upon others, to whom they in consequence incur personal
liability. In this case the fraud is found to have been committed by the
appellant against the creditors of the company, but it is clear that, if so,
though be may have been its originator and the only person who took benefit from
it, he could not have done any of those things which, taken together, are said
to constitute his fraud without the consent and privity of the other
shareholders. It seems doubtful whether a liquidator, as representing and in the
name of the company, can sue its members for redress against a fraud which was
committed by the company itself and by all its shareholders.

However, I do not think it necessary to dwell upon that point, because I am not
satisfied that the charge of fraud against creditors has any foundation in fact.
The memorandum of association gave notice that the main object for which the
company was formed was to adopt, and carry into effect, with or without
modifications, the agreement of 20 July 1892, under the terms of which the
debentures for 10,000 pounds were subsequently given to the appellant in part
payment of the price. By the articles of association – art. 62(e) – the
directors were empowered to issue mortgage or other debentures or bonds for any
debts due, or to become due, to the company, and it is not alleged or proved
that there was any failure to comply with s. 43 or the other clauses of Part III
of the Act Companies Act, 1948, Part III, ss 110 et seq] which relate to the
protection of creditors. The unpaid creditors of the company, whose unfortunate
position has been attributed to the fraud of the appellant, if they had thought
fit to avail themselves of the means of protecting their interests which the Act
provides, could have informed themselves of the terms of purchase by the
company, of the issue of debentures to the appellant, and of the amount of
shares held by each member. In my opinion the statute casts upon them the duty
of making inquiry in regard to those matters. Whatever may be the moral duty of
a limited company and its shareholders, when the trade of the company is not
thriving, the law does not lay any obligation upon them to warn those members of
the public who deal with them on credit that they run the risk of not being
paid. One of the learned judges asserts, and I see no reason to question the
accuracy of his statement, that creditors never think of examining the register
of debentures. But the 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 the Act of 1862 requires. And, in my opinion, a creditor
who will not take the trouble to use the means which the statute provides for
enabling him to protect himself must bear the consequences of his own

For these reasons I have come to the conclusion that the orders appealed from
ought to be reversed, with costs to the appellant here and in both courts below.
His costs in this House must, of course, be taxed in accordance with the rule
applicable to pauper litigants.


By an order of the High Court, which was affirmed by the Court of Appeal, it was
declared that the respondent company, or the liquidator of that company, was
entitled to be indemnified by the appellant against the sum of 7,733 pounds 8s
3d, and it was ordered that the respondent company should recover that sum
against the appellant. On 28 July 1892, the respondent company was incorporated
with a capital of 40,000 pounds, divided into 40,000 shares of 1 pound each. One
of the objects for which the company was incorporated was to carry out an
agreement, with such modifications therein as might be agreed to, of 20 July
1892, which had been entered into between the appellant and a trustee for a
company intended to be formed for the acquisition by the company of the business
then carried on by the appellant. The company was in fact formed for the purpose
of taking over the appellant’s business of leather merchant and boot
manufacturer, which he had

[1895-99] All ER Rep 33 at  43

carried on for many years. The business had bean a prosperous one, and, as the
learned judge who tried the action found, was solvent at the time when the
company was incorporated. The memorandum of association of the 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 him. For these he paid 1 pound per share out of the purchase money which, by
agreement, he was to receive for the transfer of his business to the company.

The company afterwards became insolvent and went into liquidation. In an action
brought by a debenture-holder on behalf of himself and all the other
debenture-holders including the appellant, the respondent company set up by way
of counterclaim that the company was formed by the appellant, and the debentures
were issued in order that he might carry on the said business and take all the
profits without risk to himself, that the company was the mere nominee and agent
of the appellant, and that the company or the liquidator thereof was entitled to
be indemnified by him against all the debts owing by the company to creditors
other than the appellant. This counterclaim was not in the pleading as
originally delivered; it was inserted by way of amendment at the suggestion of
VAUGHAN WILLIAMS, J, before whom the action came on for trial. The learned judge
thought the liquidator entitled to the relief asked for and made the order
complained of. He was of opinion that the company was only an alias for Salomon:
that, the intention being that he should take the profits without running the
risk of the debts, the company was merely an agent for him, and, having incurred
liabilities at his instance, was, like any other agent under such circumstances,
entitled to be indemnified by him against them.

On appeal the decision of VAUGHAN WILLIAMS, J, was affirmed by the Court of
Appeal, that court “being of opinion that the formation of the company, the
agreement of August 1892, and the issue of debentures to Aron Salomon pursuant
to such agreement were a mere scheme to enable him to carry on business in the
name, of the company with limited liability contrary to the true intent and
meaning of the Companies Act, 1862, and further, to enable him to obtain a
preference over other creditors of the company by procuring a first charge on
the assets of the company by means of such debentures.” The learned judges in
the Court of Appeal dissented from the view taken by VAUGHAN WILLIAMS, J, that
the company was to be regarded as the agent of the appellant. They considered
the relation between them to be that of trustee and cestui qua trust, but this
difference of view, of course, did not affect the conclusion that the right to
the indemnity claimed had been established.

It is to be observed that both courts treated the company as a legal entity
distinct from Salomon and the then members who composed it, and, therefore, as a
validly constituted corporation. This is, indeed, necessarily involved in the
judgment which declared that the company were entitled to certain rights as
against Salomon. Under these circumstances, I am at a loss to understand what is
meant by saying that A Salomon & Co, Ltd, is but an alias for A Salomon. It is
not another name for the same person; the company is ex hypothesi a distinct
legal person. As little am I able to adopt the view that the company was the
agent of Salomon to carry on his business for him. In a popular sense a company
may in every case be said to carry on business for and on behalf of its
shareholders, but this certainly does not in point of law constitute the
relation of principal and agent between them or render the shareholders liable
to indemnify the company against the debts which it incurs. Here, it is true,
Salomon owned all the shares except six, so that, if the business were
profitable, he would be entitled substantially to the whole of the profits. The
other shareholders, too, are said to have been “dummies,” the nominees of
Salomon. But when once it is conceded that they were individual members of the
company distinct from Salomon, and sufficiently so to bring into existence in
conjunction with him a validly constituted corporation, I am unable to see how
the facts to which I have just referred can affect the legal position of the

[1895-99] All ER Rep 33 at  44

company, or give it rights as against its members which it would not otherwise

The Court of Appeal based their judgment on the proposition that the formation
of the company, and all that followed it, was a mere scheme to enable the
appellant to carry on business in the name of the company, with limited
liability, contrary to the true intent and meaning of the Companies Act, 1862.
The conclusion which they drew from this premise, was, that the company was a
trustee and Salomon their cestui que trust. I cannot think that the conclusion
follows even if the premise be sound. It seems to me that the logical result
would be that the company had not been validly constituted, and, therefore, had
no legal existence.

But, apart from this, it is necessary to examine the proposition on which the
court have rested their 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 expression, converted into joint stock
companies, and often into what are called “private” companies, where the whole
of the shares are held by the former partners. It appears to me that all these
might be pronounced “schemes to enable” them “to carry on business in the name
of the company, with limited liability,” in the very sense in which those words
are used in the judgment of the Court of Appeal. The profits of the concern
carried on by the company will go to the persons whose business it was before
the transfer, and in the same proportions as before, the only difference being
that the liability of those who take the profits will no longer be unlimited.
The very object of the creation of the company, and the transfer to it of the
business, is that, whereas the liability of the partners for debts incurred was
without limit, the liability of the members for the debts incurred by the
company shall be limited. In no other respect is it intended that there shall be
any difference; the conduct of the business and the division of the profits are
intended to be the same as before. If the judgment of the Court of Appeal be
pushed to its logical conclusion all these companies must, I think, be held to
be trustees for the partners who transferred the business to them, and those
partners must be declared liable, without limit, to discharge the debts of the
company. For this is the effect of the judgment as regards the respondent
company. The position of the members of a company is just the same whether they
are declared liable to pay the debts incurred by the company, or by way of
indemnity to furnish the company with the means of paying them. I do not think
that the learned judges in the court below have contemplated the application of
their judgment to such cases as I have been considering, but I can see no solid
distinction between those cases and the present one.

It is said that the respondent company is a “one- man” company, and that in this
respect it differs from such companies as those to which I have referred. But it
has often happened that a business transferred to a joint stock company, has
been the property of three or four persons only, and that the other subscribers
of the memorandum have been clerks or other persons who possessed little or no
interest in the concern. I am unable to see how it can be lawful for three or
four or six persons to form a company for the purpose of employing their capital
in trading, with the benefit of limited liability, and not for one person to do
so, provided in each case the requirements of the statute have been complied
with, and the company has been validly constituted. How does it concern the
creditor whether the capital of the company is owned by seven persons in equal
shares, with the right to an equal share of the profits, or whether it is almost
entirely owned by one person who takes practically the whole of the profits? The
creditor has notice that he is dealing with a company the liability of the
members of which is limited, and the register of shareholders informs him how
the shares are held, and that they are substantially in the hands of one person,
if this be the fact.

The creditors in the present case gave credit to and contracted with a limited
company; the effect of the decision is to give them the benefit as regards one
of the shareholders, of unlimited liability. I have said that the liability of

[1895-99] All ER Rep 33 at  45

carrying on business can only be limited provided the requirements of the
statute be complied with, and this leads naturally to the inquiry what are those
requirements? The Court of Appeal has declared that the formation of the
respondent company, and the agreement to take over the business of the
appellant, were a scheme “contrary to the true intent and meaning of the
Companies Act.” I know of no means of ascertaining what is the intent and
meaning of the Companies Act except by examining its provisions and finding what
regulations it has imposed as a condition of trading with limited liability. The
memorandum must state the amount of the capital of the company and the number of
shares into which it is divided, and no subscriber is to take less than one

[Companies Act, 1948, s 2(4)(a)(b)]. The shares may, however, he of as small a
nominal value as those who form the company please; the statute prescribes no
minimum, and though there must be seven shareholders it is enough if each of
them holds one share, however small its denomination.

The legislature, therefore, clearly sanctions a scheme by which all the shares,
except six, are owned by a single individual, and these six are of a value
little more than nominal. It was said that in the present case, the six
shareholders other than the appellant were mere dummies, his nominees, and held
their shares in trust for him. I will assume that this was so. In my opinion, it
makes no difference. The statute forbids the entry in the register of any trust
[s 117 of Act of 1948], and it certainly contains no enactment that each of the
seven persons subscribing the memorandum must be beneficially entitled to the
share or shares for which he subscribes. The persons who subscribe the
memorandum or who have agreed to become members of the company, and whose names
are on the register, are alone regarded as, and, in fact, are, the shareholders.
They are subject to all the liability which attaches to the holding of the
share. They can be compelled to make any payment which the ownership of a share
involves. Whether they are beneficial owners or bare trustees is a matter with
which neither the company nor creditors have any. thing to do; it concerns only
them and their cestuis que trust if they have any.

If, then, in the present case all the requirements of the statute were complied
with and a company was effectually constituted, and this is the hypothesis of
the judgment appealed from, what warrant is there for saying that what was dune
was contrary to the true intent and meaning of the Companies Act? It may be that
it company constituted like that under consideration was not in the
contemplation of the legislature at the time when the Act authorising limited
liability was passed; that if what is possible under the enactments as they
stand had been foreseen, a minimum sum would have been fixed as the least
denomination of share permissible, and it would have been made a condition that
each of the seven persons should have a substantial interest in the company. But
we have to interpret the law, not to make it; and it must be remembered that no
one need trust a limited liability company unless he so please, and that before
be does so he can ascertain, if he so please, what is the capital of the
company, and how it is held.

I have hitherto made no reference to the debentures which the appellant received
in part payment of the purchase money of the business which he transferred to
the company. These are referred to in the judgment as part of the scheme which
is pronounced contrary to the true intent and meaning of the Companies Act. But
if apart from this the conclusion that the appellant is bound to indemnify the
company against its debts cannot be sustained, I do not see how the circumstance
that he received these debentures can avail the respondent company. The issue of
debentures to the vendor of a business as part of the price is certainly open to
great abuse, and has often worked grave mischief. It may well be that some check
should be placed upon the practice, and that at all events, ample notice to all
who may have dealings with the company should be secured. But as the law at
present stands there is certainly nothing unlawful in the creation of such
debentures. For these reasons I have come to the conclusion that the appeal
should be allowed. It was contended on behalf of the company that the agreement
between them and

[1895-99] All ER Rep 33 at  46

the appellant ought at all events, to be, set aside on the ground of fraud. In
my opinion, no such case has been made out, and I do not think that the
respondent company are entitled to any such relief.


I cannot help thinking that the appellant, Aron Salomon, has been dealt with
somewhat hardly in this case. Mr Salomon, who is now suing as a pauper, was a
wealthy man in July 1892. He was a boot and shoe manufacturer, trading on his
own sole account under the firm of “A Salomon & Co,” in High Street,
Whitechapel, where he had extensive warehouses and a large establishment. He had
been in the trade over thirty years. He had lived in the same neighbourhood all
along, and for many years past he had occupied the same premises. So far things
had gone very well with him. Beginning with little or no capital he had
gradually built up a thriving business, and he was undoubtedly in good credit
and repute. It is impossible to say exactly what the value of the business was.
But there was a substantial surplus of assets over liabilities. And it seems to
me to be pretty clear that, if Mr Salomon had been minded to dispose of his
business in the market as a going concern, he might fairly have counted upon
retiring with at least 70,000 pounds in his pocket. Mr Salomon, however, did not
want to part with the business. He had a wife and a family consisting of five
sons and a daughter. Four of the sons were working with their father. The
eldest, who was about thirty years of age, was practically the manager. But the
sons were not partners; they were only servants. Not unnaturally, perhaps, they
were dissatisfied with their position. They kept pressing their father to give
them a share in the concern. “They troubled me,” says Mr Salomon, “all the
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 the business and make provision for his family. In those
words, I think, he fairly describes the principal motives which influenced his

All the usual formalities were gone through; all the requirements of the
Companies Act, 1862, were duly observed. There was a contract with a trustee in
the usual form for the sale of the business to a company about to be formed.
There was a memorandum of association duly signed and registered, stating that
the company was formed to carry that contract into effect, and fixing the
capital at 40,000 pounds in 40,000 shares of 1 pound each. There were articles
of association providing the usual machinery for conducting the business. The
first directors were to be nominated by the majority of the subscribers to the
memorandum of association. The directors, when appointed, were authorised to
exercise all such powers of the company as were not by statute or by the
articles required to be exercised in general meeting; and there was express
power to borrow on debentures, with the limitation that the borrowing was not to
exceed 10,000 pounds without the sanction of a general meeting. The company was
intended from the first to be a private company; it remained a private company
to the end. No prospectus was issued; no invitation to take shares was ever
addressed to the public. The subscribers to the memorandum were Mr Salomon, his
wife, and five of his children who were grown up. The subscribers met and
appointed Mr Salomon and his two elder sons directors.

The directors then proceeded to carry out the proposed transfer. By an agreement
dated 2 August 1892, the company adopted the preliminary contract, and in
accordance with it the business was taken over by the company as from 1 June
1892. The price fixed by the contract was duly paid. The price on paper was
extravagant. It amounted to over 39,000 pounds, a sum which represented the
sanguine expectations of a fond owner rather than anything that 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 the facts of the case and
the position of the parties are considered, it is difficult to see what bearing
it has on the question before your Lordships. The purchase money was paid in
this way. As money came in sums amounting to 20,000 pounds were paid to Mr
Salomon, and then immediately returned

[1895-99] All ER Rep 33 at  47

to the company in exchange for fully-paid shares. The sum of 10,000 pounds was
paid in debentures for the like amount. The balance, with the exception of about
1,000 pounds, which Mr Salomon seems to have received and retained went in
discharge of the debts and liabilities of the business at the time of the
transfer, which were thus entirely wiped off. In the result, therefore, Mr
Salomon received for his business about 1,000 pounds in cash, 10,000 pounds in
debentures and half the nominal Capital of the company in fully-paid shares for
what they were worth. No other shares were issued except the seven shares taken
by the subscribers to the memorandum, who, of course, knew all the
circumstances, and had, therefore, no ground for complaint on the score of

The company had a brief career; it fell upon evil days. Shortly after it was
started there seems to have come a period of great depression in the boot and
shoe trade. There were strikes of workmen too, and in view of that danger,
contracts with public bodies, which were the principal source of Mr Salomon’s
profit, were split up and divided between different firms. The attempts made to
push the business on behalf of the new company crammed its warehouses with
unsaleable stock. Mr Solomon seems to have done what he could; both he and his
wife lent the company money, and then he got his debentures cancelled and
re-issued to a Mr Broderip, who advanced him 5,000 pounds, which he immediately
handed over to the company on loan. The temporary relief only hastened 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 the company’s asset. They realised enough to pay Mr Broderip, but
not enough to pay the debentures in full, and the unsecured creditors were
consequently left out in the cold. In this state of things the liquidator met Mr
Broderip’s claim by a counterclaim, to which he made Mr Salomon defendant. He
disputed the validity of the debentures on the ground of fraud. On the same
ground he claimed rescission of the agreement for the transfer of the business,
cancellation of the debentures, and repayment by Mr Salomon of the balance of
the purchase money. In the alternative he claimed payment of 20,000 pounds on Mr
Salomon’s shares, alleging that nothing had been paid on them.

When the trial came on before VAUGHAN WILLIAMS, J, the validity of Mr Broderip’s
claim was admitted, and it was not disputed that the 20,000 shares were fully
paid up. The case presented by the liquidator broke down completely. But the
learned judge suggested that the company had a right of indemnity against Mr
Salomon. The signatories of the memorandum of association were, he said, mere
nominees of Mr Salomon, mere dummies. The company was Mr Salomon in another
form. He used the name of the company as an alias. He employed the company as
his agent; so the company, he thought, was entitled to indemnity against its
principal. The counterclaim was, accordingly, amended to raise this point, and
on the amendment being made the learned judge pronounced an order in accordance
with the view he had expressed.

The order of the learned judge appears to me to be founded on a misconception of
the scope and effect of the Companies Act, 1862. In order to form a company
limited by shares, the Act requires that 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 matter whether the signatories are
relations or strangers? There is nothing in the Act requiring that the
subscribers to the memorandum should be independent or unconnected, or that they
or any one of them should take a substantial interest in the undertaking, or
that they should have a mind and will of their own, as one of the learned lords
justices seems to think, or that there should be anything like a balance of
power in the constitution of the company. In almost every company that is
formed, the statutory number is eked out by clerks or friends, who sign their
names at the request of the promoter or promoters without intending to take any
further part or interest in the matter.

[1895-99] All ER Rep 33 at  48

When the memorandum is duly signed and registered, though there be only seven
shares taken, the subscribers are a body corporate “capable forthwith” to use
the words of the enactments, “of exercising all the functions of at)
incorporated company” [Companies Act, 1948, s 13(2)]. Those are strong words.
The company attains maturity on its birth. There is no period of minority; an
interval of incapacity. I cannot understand hors a body corporate thus made
“capable” by statute can lose its individuality by issuing the bulk of its
capital to one person, whether he be a subscriber to the memorandum or not. The
company is at lain a different person altogether from the subscribers to the
memorandum, and, though it may be that after incorporation the business is
precisely the same as it was before, the same persons are managers, and the same
hands receive the profits, the company is not in law the agent of the
subscribers or trustee for them. Nor are the subscribers as members liable, in
any shape or form, except to the extent and in the manner provided by the Act.
That is, I think, the declared intention of the enactment. If the view of the
learned judge were sound, it would follow that no common law partnership could
register as a company limited by shares without remaining subject to unlimited

Mr Salomon appealed, but his appeal was dismissed with costs, though the
appellate court did not entirely accept the view of the court below. The
decision of the Court of Appeal proceeds on a declaration of opinion embodied in
the order which has been already read. I must say that I, too, have great
difficulty in understanding this declaration. If it only means that Mr Salomon
availed himself to the full of the advantages offered by the Companies Act,
1862, what is there wrong in that. Leave out the words “contrary to the true
intent and meaning of the Companies Act, 1862;” and bear in mind that “the
creditors of the company” are not the creditors of Mr Salomon, and the
declaration is perfectly innocent. It has no sting in it. In an early case (Re
Baglan Hall Colliery Co (2)) which in some of its aspects is not unlike the
present, the owners of a colliery (to quote the language of GIFFARD, LJ, in the
Court of Appeal) “went on working the colliery not very successfully, and then
determined to form a limited company, in order to avoid incurring further
personal liability.” The lord justice adds: “It was the policy of the Companies
Act to enable this to be done.” And so be reversed the decision of MALINS, V- C,
who had expressed an opinion that if the laws of the country sanctioned such a
proceeding they were “in a most lamentable, state,” and had fixed the former
owners with liability for the amount of the shares they took in exchange for
their property.

Among the principal reasons which induce persons to form private, companies as
is stated very clearly by MR PALMER in his treatise on the subject, are the
desire to avoid the risk of bankruptcy, and the 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 the persons
interested in it in the event of failure to the harsh provisions of the
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 the company’s debentures as any outside creditor.
Every creditor is entitled to get and to hold the best security the law allows
him to take. If, however, the declaration of the Court of Appeal means that Mr
Salomon acted fraudulently or dishonestly, I must say that I can find nothing in
the evidence to support such as imputation. The purpose for which Mr Salomon and
the other subscribers to the memorandum were associated was “lawful.” The fact
that Mr Salomon raised 6,000 pounds for the company on debentures that belonged
to him seems to me strong evidence of his good faith and of his confidence in
the company.

The unsecured creditors of A Salomon & Co, Ltd, may be entitled to sympathy, but
they have only themselves to blame for their misfortunes. They trusted the
company, I suppose, because they had long dealt with Mr Salomon and he had
always paid his way; that they had fair notice that they were no longer dealing

[1895-99] All ER Rep 33 at  49

an individual, and they must be taken to have been cognisant of the memorandum
and of the articles of association. For such a catastrophe as has occurred in
this case some would blame the law that allows such a thing as a floating
charge. But a floating charge is, too convenient a form of security to be
lightly abolished. I have long thought, and I believe some of your Lordships
also think, that the ordinary trade creditors of a trading company ought to have
a preferential claim on the assets in liquidation in respect of debts incurred
within a certain limited time before the winding-up. But that is not the law at
present. Everybody knows that when there is a winding-up, debenture holders
generally step in and sweep off everything. And a great scandal it is.

It has become the fashion to call companies of this class “one-man companies.”
That is a taking nickname, but it does not help one much in the way of argument.
If it is intended to convey the meaning that a company which is under the
absolute control of one person is not a company legally incorporated, although
the requirements of the Act of 1862 may have been complied with, it is
inaccurate and misleading; if it merely means that there is a predominant
partner possessing an overwhelming influence and entitled practically to the
whole of the profits, there is nothing in that that I can see contrary to the
true intention of the Act of 1862, or against public policy, or detrimental to
the interests of creditors. If the shares the fully paid up it cannot matter
whether they are in the hands of one or many. If the shares are not fully paid
it is as easy to gauge the solvency of an individual as to estimate the
financial ability of a crowd.

One argument was addressed to your Lordships which ought perhaps to be noticed
although it was not the ground of decision in either of the courts below. It was
argued that the agreement for the transfer of the business to the company might
to be set aside, because there was no independent board of directors, and the
property was transferred at an over-value. There are, it seems to me, two
answers to that argument. In the first place, the directors did just what they
were authorised to do by the memorandum of association. There was no fraud or
misrepresentation and there was nobody deceived. In the second place the company
have put it out of their power to restore the property which was transferred to
them. It was said that the assets were sold by an order made in the presence of
Mr Salomon, though not with his consent, which declared that the sale was to be
without prejudice to the rights claimed by the company by their counterclaim. I
cannot see what difference that makes. The reservation in the order seems to me
to be simply nugatory. I am of opinion that the appeal ought to be allowed and
the counterclaim of the company dismissed with costs, both here and below.


I quite concur in the decision which has been announced and in the reasons which
have been so fully given for it.


It is possible, and (I think) probable, that the conclusion to which I feel
constrained to come in this case may not have been contemplated by the
legislature, and may be due to some defect in the machinery of the Act. But,
after all, the intention of the legislature must be collected from the language
of its enactments, and I do not see my way to holding that, if there are seven
registered members, the association is not a company formed in compliance with
the provisions, of the Act, and capable of carrying on business with limited
liability either because the bulk of the shares are held by some only, or even
one of the members, and the others are what is called “dummies,” holding, it may
be, only one share of 1 pound each, or because there are less than seven persons
who are beneficially entitled to the shares. I think that this result follows
from the absence of any provision fixing a minimum nominal amount of a share,
the provision in s 8 of the Companies Act, 1862 [s 2(4)(b) of Act of 1948] that
no subscriber shall take less than one share, and the provision in s 30 [s 117
of Act of 1948] that no notice of any trust shall be entered on the register.
With regard to the latter provision, it would, in my opinion, Ire impossible to
work the machinery of the

[1895-99] All ER Rep 33 at  50

Act on any other principle, and to attempt to do so would lead only to confusion
and uncertainty.

The learned counsel for the respondents (wisely, as I think) did not lay any
stress at the members, other than the appellant, being trustees for him of their
shares. Their argument was that they were “dummies,” and did not hold a
substantial interest in the company – ie, what a jury would sap is a substantial
interest. In the language of some of the judges in the court below, any jury, if
asked the question, would say the business was Aron Salomon’s, and no one
else’s. It was not argued in this case that there was no association of seven
persons to be registered and that the registration, therefore, operated nothing,
or that the so-called company was a sham and might be disregarded. And, indeed,
it would have been difficult for the learned counsel for the respondents
appearing, as they did, at your Lordships’ Bar for the company who had been
permitted to litigate in the courts below as actors on their counterclaim, to
contend that their clients were non-existent. I do not say that such an argument
ought to or would prevail; I only observe that, having regard to the decisions,
it is not certain that s 18 [s 15(1) of Act of 1948], making the certificate of
the registrar conclusive evidence that all the requisitions of the Act in
respect of registration had been complied with, would be an answer to it.

We start, then, with the assumption that the respondents have a corporate
existence with power to site 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. Both
the courts below have, however, held that the appellant is liable to indemnify
the company against all its debts and liabilities. VAUGHAN WILLIAMS, J, held
that the company was an alias for the appellant, who carried on his business
through the company As his agent, and that he was bound to indemnify his own
agent, and he arrived at this conclusion on the ground that the other members of
the company had no substantial interest in it, and the business in substance was
the appellant’s. The Court of Appeal thought the relation of the company to the
appellant was that of trustee to cestui qua trust. The ground on which the
learned judges seem to have chiefly relied was that it was an attempt by an
individual to carry on his business with limited liability, which was forbidden
by the Act and unlawful. I observe in passing that nothing turns upon there
being only one person interested. The argument would have been just as good if
there had been six members holding the bulk of the 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 the courts below the
conclusion follows from the premises, or in what way the company became an agent
or trustee for the 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 the members amongst whom they are to be
divided. There was certainly no express trust for the appellant, and an implied
or constructive trust can only be raised by virtue of some equity. I took the
liberty of asking the learned counsel what the 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 persons, with corporate attributes, and capable of incurring legal
liabilities. Nor do I think it legitimate to inquire whether the interest of any
member is substantial when the Act has declared that no member need hold more
than one share, and has not prescribed any minimum amount of a share. If, as was
said in the Court of Appeal, the company was formed for an unlawful purpose, or
in order to achieve an object not permitted by the provisions of the Act, the
appropriate remedy (if any) would seem to be to set aside the certificate of
incorporation, or to treat the company as a nullity, or, if the appellant has
committed a fraud or misdemeanour (which I do not think he has) he may be
proceeded against civilly or criminally; but how either of these states of
circumstances creates the relation of cestui qua trust and trustee, or principal
and agent, between the appellant and respondents, is not apparent to my

[1895-99] All ER Rep 33 at  51

I am, therefore, of opinion that the order appealed from cannot be supported on
the grounds stated by the learned judges. But counsel for the respondent company
also relied on the alternative relief claimed by his pleadings, which was quite
open to him here, viz, that the contract for purchase of the appellant’s
business ought to be set aside for fraud. The fraud seems to consist in the
alleged exorbitance of the price, and the fact that there was no independent
board of directors with whom the appellant could contract. I am of opinion that
the fraud was not made out. I do not think the price of the appellant’s business
(which seems to have been a genuine one, and for some time a prosperous
business) was so excessive as to afford grounds for rescission, and as regards
the cash portion of the price it must be observed that as the appellant held the
bulk of the shares, or (the respondents say) was the only shareholder, the money
required for the payment of it came from himself in the form either of calls on
his shares or profits which would otherwise be divisible.

Nor was the absence of any independent board material in a case like the
present. I think it an inevitable inference from the circumstances of the case
that every member of the company assented to the purchase, and the company is
bound in a matter intra vires by the unanimous agreement of its members. In
fact, it is impossible to say who was defrauded. Counsel relied on some dicta in
Erlanger v New Sombrero Phosphate Co (1) a case which is often quoted and not
unfrequently 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 the
vendor and the directors before the shares were offered for subscription,
whereas it appeared that the directors were only the nominees of the vendor, who
had accepted his bidding, and exercised no judgment of their own. It has nothing
to do with the present case. That a company may contract with the holder of the
bulk of its shares, and such contract will be binding, though carried only by
the votes of that shareholder, was decided in North-West Transportation Co v
Beatty (3).

For these reasons I am of opinion that the appellant’s appeal should be allowed
and the cross appeal should be dismissed. I agree to the proposed order as to

In the original appeal, order appealed from reversed, with costs below, and such
costs in this House as are appropriate in the case of a pauper appeal. In the
cross-appeal, order appealed from affirmed, and appeal dismissed with costs to
the same extent.

Solicitors: Ralph Raphael & Co; SM & JB Benson

Reported by CE MALDEN, ESQ, Barrister-at-Law.

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