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As a matter of fact, persons do not ask to see mortgage registers before they deal with limited companies; and this is perfectly well known to every one acquainted with the actual working of the Companies Acts and the habits of business men.
Aron Salomon and his advisers, who were evidently very shrewd people, were fully alive to this circumstance. If the legislature thinks it right to extend the principle of limited liability to sole traders it will no doubt do so, with such safeguards, if any, as it may think necessary.
But until the law is changed such attempts as these ought to be defeated whenever they are brought to light They do infinite mischief; they bring into disrepute one of the most useful statutes of modern times, by perverting its legitimate use, and by making it an instrument for cheating honest creditors.
Lopes L J. The House of Lords unanimously overturned this decision, rejecting the arguments of agency. They held that there was nothing in the Act about whether the subscribers i.
The company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient.
Lord Halsbury LC stated that the statute "enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others.
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….
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, who is often referred to as 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 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.
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 proposition 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 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.
Lord Herschell noted the potentially "far reaching" implications of the Court of Appeal's logic and that in recent years many companies had been set up in which one or more of the seven shareholders were "disinterested persons" who did not wield any influence over the management of the company.
Anyone dealing with such a company was aware of its nature as such, and could by consulting the register of shareholders become aware of the breakdown of share ownership among the shareholders.
Lord Macnaghten asked what was wrong with Mr. Salomon taking advantage of the provisions set out in the statute, as he was perfectly legitimately entitled to do.
It was not the function of judges to read limitations into a statute on the basis of their own personal view that, if the laws of the land allowed such a thing, they were "in a most lamentable state", as Malins V-C had stated in an earlier case in point, In Re Baglan Hall Colliery Co.
The key parts of his judgement were as follows. 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.
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….
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 I can find nothing in the evidence to support such an imputation.
The purpose for which Mr. Salomon and the other subscribers to the memorandum were associated was "lawful. 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.
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