Righthaven LLC v. Newman

Filing 25

MOTION to Dismiss for Lack of Jurisdiction Subject Matter and Personal First Amended Complaint by Defendant Garry Newman. Responses due by 8/18/2011. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D, # 5 Exhibit E, # 6 Exhibit F, # 7 Exhibit G, # 8 Exhibit H, # 9 Exhibit I, # 10 Exhibit J)(DiRaimondo, Anthony)

Exhibit J

{00641518.1}

*22 Aron Salomon (Pauper) Appellant; v A.
Salomon and Company, Limited Respondents. by
Original Appeal.
House of Lords
L.C. Lord Halsbury, Lord Watson, Lord Herschell,
Lord Macnaghten, Lord Morris, and Lord Davey
1896 Nov. 16.
Company—Private Company—One Man Company—Limited
Liability—Winding—up—Fraud
upon Creditors—Liability to indemnify Company in
respect of Debts—Rescission—Companies 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 debentureholder over other creditors, to sell his business to a
limited company consisting only of himself and six
members of his own family, the business being then
solvent, all the terms of sale being known to and approved by the shareholders, and all the 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 1l.
each, the company consisting only of the vendor, his
wife, a daughter and four sons, who subscribed for
one share each, all the terms of sale being known to
and approved by the shareholders.*23 In part payment of the purchase-money debentures forming a
floating security were issued to the vendor. Twenty
thousand shares were also issued to him and were
paid for out of the purchase-money. These shares
gave the vendor the power of outvoting the six other
shareholders. No shares other than these 20,007 were
ever issued. All the requirements of the Companies
Act 1862 were complied with. The vendor was appointed managing director, bad times came, the company was wound up, and after satisfying the debentures there was not enough to pay the ordinary creditors: —

that the proceedings were not contrary to the true
intent and meaning of the Companies Act 1862; that
the company was duly formed and registered and was
not the mere “alias” or agent of or trustee for the
vendor; that he was not liable to indemnify the company against the creditors' claims; that there was no
fraud upon creditors or shareholders; and that the
company (or the liquidator suing in the name of the
company) was not entitled to rescission of the contract for purchase. The decisions of Vaughan Williams J. and the Court of Appeal ([1895] 2 Ch. 323)
reversed.
THE following statement of the facts material to this
report is taken from the judgment of Lord Watson: —
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 of transferring his business to a joint stock
company, which was to consist exclusively of himself and members of his own family, he, on July 20,
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 part
payment might be made to him 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 July 28, 1892;
and the effect of registration, if otherwise valid, was
to incorporate the company, under the name of “Aron
Salomon and Company, Limited,” with liability limited by shares, and having a nominal capital of
40,000l., divided into 40,000 shares of 1l. each. The
company adopted*24 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 August 2, 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 100l. each, were issued

Exhibit J

to the appellant, who, upon the security of these
documents, obtained an advance of 5000l. 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 1055l., which is claimed by the appellant 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 7733l. 8s. 3d.
The liquidator lodged a defence, in name of the
company, to the debenture suit, in which he counterclaimed against the appellant (who was made a party
to the counter-claim), (1.) to have the agreements of
July 20 and August 2, 1892 rescinded,*25 (2.) to
have the debentures already mentioned delivered up
and cancelled, (3.) judgment against the appellant for
all sums paid by the company to the appellant under
these agreements, and (4.) 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 8200l.; 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 action came on for
trial on the counter-claim before Vaughan Williams
J., when the liquidator was examined as a witness on
behalf of the company, whilst 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 shews that, before its transfer to the
new company, the 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 that at the date of 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 on 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 nonsuccess 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. 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 August 2,
1892, and that they were willing to accept and did
accept these terms.*26
At the close of the argument Vaughan Williams J.
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 counter-claim to be amended. In conformity with the suggestion thus made by the Bench, a
new and alternative claim was added for a declaration
that the company or the liquidator was entitled (1.) to
be indemnified by the appellant against the whole of
the company's unsecured debts, namely, 7733l. 8s.
3d.; (2.) to judgment against the appellant for that
sum; and (3.) to a lien for that amount upon all sums
which might be payable to the appellant by the com-

Exhibit J

pany 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 10,000l.
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.
Vaughan Williams J. made an order for a declaration
in the terms of the new and alternative counter-claim
above stated, without making any order on the original counter-claim.
Both parties having appealed, the Court of Appeal
(Lindley, Lopes and Kay L.JJ.) being of opinion that
the formation of the company, the agreement of August 1892, and the issue of debentures to the appellant 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, dismissed the appeal with costs, and
declined to make any order on the original counterclaim. 1
Against this order the appellant appealed, and the
company brought a cross-appeal against so much of it
as declined to make any order upon the original
counter-claim. Broderip having been paid off was no
party to this appeal or cross-appeal.*27
June 15, 22, 29. Cohen Q.C. and Buckley
Q.C.(McCall Q.C. and Muri Mackenzie with them),
for the appellant in the original appeal. The view of
Vaughan Williams J. that the company was the mere
alias or agent of the appellant so as to make him liable to indemnify the company against creditors, was
not adopted by the Court of Appeal, who seem to
have considered the company as the appellant's trustee. There is no evidence in favour of either view.
The sale of the business was bonâ fide: the business
was genuine and solvent, with a substantial surplus.
All the circumstances were known to and approved
by the shareholders. All the requirements of the
Companies Act, 1862, were strictly complied with:
the purpose was lawful, the proceedings were regular.
How could the registrar refuse to register such a

company? What objection is it that the vendor desires
to convert his unlimited into a limited liability? That
is the prime object of turning 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 the debentures were held by
the vendor or by strangers? Whoever held them had
the preference over creditors - that is the future creditors - all the old creditors having been paid off by the
vendor. There was no misrepresentation of fact, and
no one was misled: where is “the fraud upon creditors” spoken of in the Court of Appeal? The creditors
were under no obligation to trust the company; they
might, if they had desired, have found out who held
the shares, and in what proportion, and who held the
debentures. There is not a word in ss. 6, 8, 30, 43, or
any other section of the Companies Act, 1862, forbidding or even pointing against such a company so
formed and for such objects. Then, if the company
was a real company, fulfilling all the requirements of
the 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 unreal: it
must be one or the other, it cannot be both. A Court
cannot impose conditions not imposed by the Legislature, and say that the shareholders must not be related*28 to each other, or that they must hold more
than one share each. There is nothing to prevent one
shareholder or all the shareholders holding the shares
in trust for some one person. What is prohibited is the
entry of a trust on the register: s. 30. If all the shares
were held in trust that would not make the company a
trustee. The authorities relied upon below (which all
turn upon some one being deceived or defrauded) do
not touch the present case and do not support the
judgment below.
[They referred to Reg. v. Arnaud 2 ; In re Ambrose
Lake Tin and Copper Mining Co. 3 ; In re British
Seamless Paper Box Co. 4 ; Farrar v. Farrars, Limited
5 ; North-West Transportation Co. v. Beatty 6 ; In re
National Debenture and Assets Corporation7 ; In re
George Newman & Co.8 ]
As to the cross-appeal, there being no fraud, misrepresentation or deceit, not even any failure of consideration, there is no ground for rescission. Moreover,
the company's assets having been sold the company
is not in a position to ask for it.

Exhibit J

Farwell Q.C. and H. S. Theobald, for the respondents. The question is one of fact rather than law, and
the true inferences from the facts are these: The appellant incorporated the company to carry on his
business without risk to himself and at his creditors'
expense. The business was decaying when the company was formed, and though carried on as before,
nay with more (borrowed) money, it failed very soon
after the sale. To get an advantage over creditors the
vendor took debentures and concealed the fact from
them. The purchase-money was exorbitant, the price
dictated solely by the vendor, and there was no independent person acting for the company. Though incorporated under the Acts the company never had an
independent existence: it was in fact the appellant
under another name; he was the managing director,
the other directors being his sons and under his control. The shareholders other than himself were his
own family, and his vast preponderance of shares
made him absolute master.*29 He could pass any
resolution, and he would receive all the profits - if
any. Whether therefore the company is considered as
his agent, or his nominee or his trustee, matters little.
The business was solely his, conducted solely for him
and by him, and the company was a mere sham and
fraud, in effect entirely contrary to the intent and
meaning of the Companies Act. The liquidator is
therefore entitled to counter-claim against him for an
indemnity. As to the cross-appeal and the claim for
rescission the decision in Erlanger v. New Sombrero
Phosphate Co. 9 and the observations of Lord
Cairns are precisely applicable and conclusive in favour of rescission. See also Adam v. Newbigging. 10
[LORD WATSON referred to Western Bank of Scotland v. Addie 11 , following Clarke v. Dickson. 12 ]
[They also referred to Ex parte Cowen 13 ; In re
Smith. 14 ]
The House took time for consideration.
Nov. 16. LORD HALSBURY L.C.
My Lords, the important question in this case, I am
not certain 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.
Now, that there were seven actual living persons
who held shares in the company has not been
doubted. As to the proportionate amounts held by
each I will deal 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*30 be competent to any one - 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 share-holders over the others. One
share is enough. Still less is it possible to contend that
the motive of becoming shareholders 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 liabilities, and, dealing with them in their relation to the company, the
only relations 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 shew that
a fraud had been committed upon the officer entrusted with the duty of giving the certificate, and that
by some proceeding in the nature of scire facias you
could not prove the fact that the company had no real
legal existence. But short of such proof it seems to
me impossible to dispute that once the company is

Exhibit J

legally incorporated it must be treated like any other
independent person with its 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*31 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 or
schemes of those who brought it into existence.
I observe that the learned judge (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. Either 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 no thing to be an
agent at all; and it is impossible to say at the same
time that there is a company and there is not.
Lindley L.J., 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. The object of the whole
arrangement is 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 proposi-

tion as this, that the seven shareholders 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*32 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?
My Lords, 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 L.J. says: “The Act contemplated the incorporation of seven independent bonâ 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 bonâ 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 L.J. also said that the company was a
mere nominis umbra. Kay L.J. says:
“The statutes were intended to allow seven or more
persons, bonâ 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*33

Exhibit J

enabling an individual to carry on his own business
with limited liability in the name of a joint stock
company.”
My Lords, 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. 15 , (I quote the head-note), is
that “Persons who purchase property and then create
a company to purchase from them the property they
possess, 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.
My Lords, the truth is that the learned judges have
never allowed in their own minds the proposition that
the company*34 has a real existence. Then 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 shewn 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 the cross-appeal be dismissed
with costs to the same extent.
LORD WATSON.
My Lords, 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 I 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. [His Lordship stated the facts
above set out.]
The allegations of the company, in so far as they
have any relation to the amended claim, their pith
consisting in the averments*35 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 facts necessitating the inference that a fraud

Exhibit J

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 gestæ 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 the risk of that
loss. 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 that
I understand precisely in what sense it was interpreted by the learned judges whose decisions we
have to consider.
No additional proof was led after the amendment of
the counter-claim. 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 August 2, 1892, the
memorandum and articles of association, and the
minute-book of the company.
On rehearing 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 which 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*36 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, consisting of Lindley, Lopes, and
Kay L.JJ., 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 em-

bodied 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 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 opinions delivered by the
Lords Justices are strictly in keeping with the reasons
assigned in their order. Lindley L.J., observing “that
the incorporation of the company cannot be disputed,” refers to the scheme for the formation of the
company, and says 16 : “the object of the whole arrangement is to do the very thing which the Legislature intended not to be done”; and he 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
this 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 where you have a private company, and all the
shareholders in the company are perfectly cognisant
of the conditions under which the company is
formed, and the conditions*37 of 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 company.”
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 any view, these considerations are of no relevancy in a question as to
rescission between the company and the appellant.
Mr. Farwell argued that the agreement of August 2

Exhibit J

ought to be set aside upon the principle followed by
this House in Erlanger v. New Sombrero Phosphate
Co. 17 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 it 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 this 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 be, members of the company.
In my opinion, therefore, Erlanger v. New Sombrero
Phosphate Co. 18 has no application, and the original
claim of the liquidator is not maintainable.
The Lords Justices of Appeal, in disposing of the
amended claim, have expressly found that the formation of the company, with limited liability, and the
issue of 10,000l. worth of its debentures to the appellant, were “contrary to the true intent*38 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 L.J.)
does the very thing which the Legislature intended
not to be done, can yet be held 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 would have meant, although there has been an
omission to enact it. In a 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 Appeal Court, 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
counter-claim 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.
The provisions of the Act of 1862 which seem to me
to have any bearing upon this point lie within a very
narrow compass. Sect. 6 provides that any seven or
more persons, associated for a lawful purpose, 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, 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*39 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 in terms of it, and by his receiving an
allotment of shares which increased his interest in the
company to 19 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 one of these
things could subsequently render the registration 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

Exhibit J

fraud is found to have been committed by the appellant against the creditors of the company; but it is
clear that if so, though he may have been its originator and the only person who took benefit from it, he
could not have done any one 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.*40
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 July, 1892, in terms of
which the debentures for 10,000l. 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, from the company; and it is not alleged or
proved that there way any failure to comply with s.
43or the other clauses (Part III. of the Act) 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 these
matters. Whatever may be the moral duty of a limited
company and its share-holders, 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 negligence.
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. *41
LORD HERSCHELL.
My Lords, 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 7733l. 8s. 3d., and it was ordered that the respondent company should recover
that sum against the appellant.
On July 28, 1892, the respondent company was incorporated with a capital of 40,000l. divided into
40,000 shares of 1l. 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 July 20, 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 carried on for many years. The business had been
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 1l. 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 counter-claim that the company was
formed by Aron Salomon, and the debentures were
issued in order that he might carry on the said business, and take all the profits without risk to himself;

Exhibit J

that the company was the mere nominee and agent of
Aron Salomon; and that the company or the liquidator thereof was entitled to be indemnified by Aron
Salomon against all the debts owing by the company
to creditors other than Aron Salomon. This counterclaim was not in the pleading as*42 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 judgment 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 que 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 was 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., Limited, is but an “alias” for A. Salomon. It is
not another name for the same person; the company
is ex hypothesi a distinct legal persona. As little am I
able to adopt the view*43 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 company, or give it rights as
against its members which it would not otherwise
possess.
The Court of Appeal based their judgment on the
proposition that the formation of the company and all
that followed on it were 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 premiss was,
that the company was a trustee and Salomon their
cestui que trust. I cannot think that the conclusion
follows even if the premiss 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*44 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

Exhibit J

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 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 alluded. 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*45 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 practically
takes 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
persons 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 share. The shares
may, however, be 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; and it certainly*46 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
anything 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,

Exhibit J

what warrant is there for saying that what was done
was contrary to the true intent and meaning of the
Companies Act?

My Lords, I cannot help thinking that the appellant,
Aron Salomon, has been dealt with somewhat hardly
in this case.

It may be that a company constituted like that under
consideration was not in the contemplation of the
Legislature at the time when the Act authorizing 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 that 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 he does so he can ascertain, if he so
please, what is the capital of the company and how it
is held.

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.

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*47 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 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 the respondent company are entitled to any
such relief.
LORD MACNAGHTEN.

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
10,000l. 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*48 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 action.
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 40,000l. in 40,000
shares of 1l. each. There were articles of association

Exhibit J

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 authorized 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 10,000l. 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 August 2, 1892, the company adopted the preliminary contract, and in accordance*49 with it the business was taken over by the
company as from June 1, 1892. The price fixed by
the contract was duly paid. The price on paper was
extravagant. It amounted to over 39,000l. - 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 in all to
30,000l. were paid to Mr. Salomon, and then immediately returned to the company in exchange for
fully-paid shares. The sum of 10,000l. was paid in
debentures for the like amount. The balance, with the
exception of about 1000l. 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 1000l. in cash, 10,000l. 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 overvaluation.
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. Salomon seems to have
done what he could: both he and his wife lent the
company money; and then he got his debentures cancelled and reissued to a Mr. Broderip, who advanced
him 5000l., which he immediately handed over to the
company on loan. The temporary relief only hastened*50 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 assets.
They realized 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 counter-claim, to which he made Mr.
Salomon a 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 20,000l. 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 counter-claim
was accordingly amended to raise this point; and on
the amendment being made the learned judge pro-

Exhibit J

nounced 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*51 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.
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 enactment, “of exercising all
the functions of an incorporated company.” Those are
strong words. The company attains maturity on its
birth. There is no period of minority - no interval of
incapacity. I cannot understand how 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 law 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, 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 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 liability.
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*52 himself to the full of the advantages offered by the Act of 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, which in some of its aspects is not
unlike the present, the owners of a colliery (to quote
the language of Giffard L.J. 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.” “It
was,” adds the Lord Justice, “the policy of the Companies Actto enable this to be done.” And so he 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: In re Baglan Hall Colliery Co. 20
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 ot 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 I can find nothing in the evi-

Exhibit J

dence to support such an imputation. The purpose for
which Mr. Salomon and the other*53 subscribers to
the memorandum were associated was “lawful.” The
fact that Mr. Salomon raised 5000l. 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 and Company, Limited, 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; but they had
full notice that they were no longer dealing with 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 the
creation of 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 are
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.*54 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 ought to be set aside, be-

cause there was no independent board of directors,
and the property was transferred at an overvalue.
There are, it seems to me, two answers to that argument. In the first place, the directors did just what
they were authorized 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 counter-claim. 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 counter-claim of the company dismissed with
costs, both here and below,
LORD MORRIS. My Lords, I quite concur in the
judgment which has been announced, and in the reasons which have been so fully given for it.
LORD DAVEY.
My Lords, 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*55 of
1l. 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 that no subscriber shall
take less than one share, and the provision in s. 30
that no notice of any trust shall be entered on the register. With regard to the latter provision, it would, in
my opinion, be impossible to work the machinery of

Exhibit J

the 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 on 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, i.e., what a jury would say 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 the registration therefore operated nothing, or that the socalled 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 counter-claim), to contend that
their clients were nonexistent. 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, 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 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. Both the Courts below have, however, held that the appellant is liable to indemnify the
company against all its debts and liabilities.*56
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 que 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 persona, 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*57 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 those states of circumstances creates the relation of cestui que trust and
trustee, or principal and agent, between the appellant
and respondents, is not apparent to my understanding.
I am, therefore, of opinion that the order appealed
from cannot be supported on the grounds stated by
the learned judges.
But Mr. Farwell also relied on the alternative relief
claimed by his pleadings, which was quite open to
him here, namely, 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

Exhibit J

[1897] A.C. 22
[1897] A.C. 22 [1897] A.C. 22
(Cite as: [1897] A.C. 22)

Page 17

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.
Mr. Farwell relied on some dicta in Erlanger v. New
Sombrero Phosphate Co. 21 , a case which is often
quoted and not infrequently 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*58 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 by the votes of that shareholder,
was decided in North-West Transportation Co. v.
Beatty. 22

323.
2. (1846) 9 Q. B. 806.
3. (1880) 14 Ch. D. 390, 394, 398.
4. (1881) 17 Ch. D. 467, 476, 479.
5. (1888) 40 Ch. D. 395.
6. (1887) 12 App. Cas. 589.
7. [1891] 2 Ch. 505.
8. [1895] 1 Ch. 674, 685.
9. (1878) 3 App. Cas. 1218 , 1236, 1238.
10. (1888) 13 App. Cas. 308.
11. (1867) L. R. 1 H. L., Sc. 145.
12. (1858) E. B. & E. 148.
13. (1867) L. R. 2 Ch. 563.
14. (1890) 25 Q. B. D. 536, 541.
15. 3 App. Cas. 1218.
16. [1895] 2 Ch. 337, 339.
17. 3 App. Cas. 1218.

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
costs.Order of the Court of Appeal reversed and
cross-appeal dismissed with costs here and below; the
costs in this House to be taxed in the manner usual
when the appellant sues in formâ pauperis; cause
remitted to the Chancery Division. Lords' Journals,
November 16, 1896.

18. 3 App. Cas. 1218.
19. Fraction goes here
20. L. R. 5 Ch. 346.
21. 3 App. Cas. 1218, 1236.
22. 12 App. Cas. 589.
END OF DOCUMENT

1. Reported as Broderip v. Salomon, [1895] 2 Ch.

{00628735.1}©

2011 Thomson Reuters.

Exhibit J