Salomon v. Salomon - Case analysis. PDF

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Sal omonv .Sal omon

GHLaw 203 Company Law May 5, 21, 13:53 A5/P5

Still the ‘Unyielding rock’ of Company Law? An evaluation of the relevance of Salomon V Salomon & Co LTD[1897] AC 22 in the light of selected Ghanaian company law cases The case of Salomon v. Salomon1has over the years stood its ground as the most fundamental case in all of Company law history. Having set out the theoretical underpinnings and rudimentary principles of Separate legal personality and limited liability, it first brought to light the understanding of a company as a separate legal entity, distinct from its members and directors, and its members have limited liability for its debts. Creating the notion of a metaphorical “veil of 2

. incorporation” or ‘corporate veil’ between the company and its members and directors

Lord Neuberger3 referred to the case in an academic analysis as being the "unyielding rock" of corporate law.The decision in Salomon v Salomon represents a substantial obstacle in the way of an argument that the veil of incorporation can be pierced because the result of piercing the veil is drastic, in that it disregards the corporate personality and identifies the owner/controller of the company, in law, with the company by virtue of that ownership and control. However, over the course of time has the principle of veil piercing in Solomon v. Solomon maintained its relevance ?or rather do the decisions in the case still hold in the Ghanian courts

In the case of Salomon v. Salomon, Mr. Salomon had a boot manufacturing business which he decided to incorporate into a private limited company. He sold his business to the newly formed company, A Salomon & Co Ltd, and took his payment by shares and a debenture or debt of £10,000. Mr Salomon owned 20,000 £1 shares, and his wife and five children owned one share each. Some years later the company went into liquidation, and Mr Salomon claimed to be entitled to be paid first as a secured debenture holder.4 The liquidator and the other creditors objected to this, claiming that it was unfair for the person who formed and ran the company to get paid first. However, the House of Lords held that the company was a different legal person from the shareholders, and thus Mr Salomon, as a shareholder and creditor, was totally separate in law from the company A Salomon & Co Ltd. The result was that Mr Salomon was entitled to be 1 Salomon v A Salomon and Co Ltd (1897) AC 22 (HL), at pp 30-31. 2Moore, M, ‘A Temple Built on Faulty Foundations’, Piercing the Corporate Veil and the Legacy of Salomon v Salomon’ (March 2006) Journal of Business law 180 3Petrodel Resources Ltd v Prest [2013] UKSC 34, at para 67. 4Pickering, Murray A. "The Company as a separate legal entity." The Modern Law Review 31.5 (1968): 481-511.

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. repaid the debt as the first secured creditor

At first instance, Vaughan Williams J 6, held that the company was merely acting as Salomon's nominee and agent and therefore Salomon as principal had to indemnify the company's creditors personally. On appeal, the Court of Appeal in rejecting Salomon's appeal, held that Salomon was a . trustee for the company which was his mere shadow Salomon appealed to the House of Lords which rejected the lower courts' rulings. According to :7Lord MacNaghten The company is at law a different person altogether from the subscribers to the " Memorandum and, although it may be that after incorporation the business is precisely the same as it was before, and 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 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

On incorporation under Modern Ghanaian law, section 24 of the company code institutionalises the corporate veil saying, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, and borrowing money, having a bank account, employing 8 . people, entering into contracts and suing and being sued separately

Under Modern Ghanaian law, The concept of separate legal personality and limited liability makes it possible for companies to borrow monies for their daily activities as a company. It could enter into transactions of borrowing with other corporate organisation as well as with individuals. This means that companies can expand its services or businesses which in the long run ensure that many people get employment opportunities. Lenders are prepared to lend monies to companies rather than individuals because they know that the company can use its assets to secure whatever loans it takes as well as create debentures and companies can secure the same . through fixed or floating charges

With this, should a company default with it payment of borrowed monies the individuals who manage the company are not liable for the inabilities of the company. Managers risks are therefore to some extent limited as in the case of Morkor v. Kuma9 where a CEO and the 5Puig, Gonzalo Villalta. "A two-edged sword: Salomon and the Separate Legal Entity Doctrine." Murdoch University Electronic Journal of Law 7.3 (2000). 6 [1895] 2 Ch 323. 7

[1897] AC 22 at 51.

8Code, Ghana Companies. "Ghana." Companies Code,(Act 179), Act of Parliament, Accra (1963). 9Morkor v Kuma (East Coast Fisheries case) [1998-1999] SCGLR 620

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company where both sued for their inability to cover their indebtedness. The Supreme Court held that she was separate from the company and the company was responsible for its own. The decision of the supreme court in the case of Morkor v Kuma shows that where an attempt is being made to by plaintiff to attach liability to a shareholder or officer of the company the plaintiff’s case is unlikely to succeed unless the plaintiff can show that the company was being used to avoid a personal liability of the shareholder/officer or that that shareholder /officer had contractually assumed responsibility for the liabilities of the company [e.g. by providing a . [ guarantee/indemnity in relation to the companies liability The principle of limited liability and separate legal personality again has helped in the development of business in the country as it paves way for businesses to sue and be sued in its own name. A shareholder cannot be sued for the debts of the company, especially where it is a limited liability company. It can enforce its rights and sue for breaches, contractual obligations among others. In a country where the society is so polarized this features makes it possible for managers of companies and for companies to act professionally. Every contract should be met . and personal emotions are separated from business transactions

Furthermore, the concept of limited liability as defined in section 9 of the company code means that where a shareholder has paid up then he is not liable for the debts or liabilities of the company. The shareholder has no further liability in terms of the debt of the company so if the . company is in debt and is in liquidation the shareholder will not be called to pay up

This feature enables companies to open up its shares for investors to pump monies into the company and for the public to invest in the company knowing that if they default they are not going to bare an extra cost. This also means that asset of the company belongs to it and not the shareholders and therefore the shareholders cannot use its asset to settle debts. The company therefore stands on its own two feet to defend whether or not to settle monies it owns in its own way without coursing it to collapse entirely in the normal sense. As in the case of Majdoub v. Bartholomew where it was held that the company was a limited liability company and the law must recognize it as such and because the partnership had ceased to exist at the time of the . execution, the company was not liable for its debts Subsequently, In the case of Re: A Company (1985)BCC9910, The court held that it can use its powers to lift the corporate veil if it is necessary to do justice irrespective of the legal efficacy of the corporate structure. Equally in the more recent case of Convway v Ratiu11 (2006)AllER per Auld, LJ held that the readiness of the courts regardless of the precise issue involved, to draw BACK the corporate veil to do justice when common sense and reality demand it. In the same case, Sedley, LJ added the as between the insistence on the legal personality of the limited liability and the willingness to lift the veil, it is the latter which accords with common sense and . justice

In conclusion although with the passing of time it is safe to say that although the principles first developed in Salomon v. Salomon have evolved to meet the times, Salomon v. Salomon has not been departed from and cases such as Morkor v. Kuma represent occurrences where the courts have set out instances in which we permit the corporate veil to be lifted. Salomon v. Salomon is . still very much the ‘Yielding Stone’ of Company law 10Re a Company (1985) 1 BCC 99/ 1985 BCLC 333 11[2005] EWCA Civ 1302; [2006] 1 All ER 571

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Bibliography Moore, M, ‘A Temple Built on Faulty Foundations’, Piercing the Corporate Veil and the Legacy of Salomon v Salomon’ (March 2006) Journal of Business law 180 Pickering, Murray A. "The Company as a separate legal entity." The Modern Law Review 31.5 (1968): 481-511. Puig, Gonzalo Villalta. "A two-edged sword: Salomon and the Separate Legal Entity Doctrine." Murdoch University Electronic Journal of Law 7.3 (2000).

Cases

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. Salomon v A Salomon and Co Ltd (1897) AC 22 (HL), at pp 30-31 Petrodel Resources Ltd v Prest [2013] UKSC 34, at para 67. Morkor v Kuma (East Coast Fisheries case) [1998-1999] SCGLR 620 Re a Company (1985) 1 BCC 99/ 1985 BCLC 333 Convway v Ratiu 2005] EWCA Civ 1302; [2006] 1 All ER 571

Legislation Code, Ghana Companies. "Ghana." Companies Code,(Act 179), Act of . ( Parliament, Accra (1963...