Human beings are generally legal person but humanity is a state of nature and legal personality is an artificial construct, which may or may not be conferred. The origin of corporation lies in a logical extension of this separation of humanity from legal personality as the group of humans who are engaged in a common activity could attempt to simplify their joint activity by gaining legal personality from the venture.
Facts of Solomon v Solomon
Solomon was a leather merchant who converted his business into a Limited Company as Solomon & Co. Limited (the ‘company’). The company so formed consisted on Solomon, his wife and five of his children as members. The company purchased the business of Solomon for £39,000; the purchase consideration was paid in terms of £10,000 debentures conferring a charge over the company’s assets, £20,000 in fully paid, £1 share each and the balance in cash.
The company in less than one year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Solomon himself). And nothing was left for unsecured creditors. The liquidator on behalf of unsecured creditors alleged that the company was a sham and mere alias or agent for Salomon.
Court of Appeal:
The British Court of Appeal considered the matter and Kay LJ stated that
“The statue was intended to allow seven or more persons, bona fide associated for the purpose of trade to limit their liability, under certain conditions and to become a corporation. But shareholders of Salomon & Co Ltd. were not intended to legalize the pretended association for the purpose of enabling an individual to carry on his business within; limited liability in the name of joint stock company.”
Thus, the focus of court of appeal was that the six family members never intended to take part in the business and