‘I crave the law’: Salomon v Salomon, uncanny personhood and the Jews

‘I crave the law’

Salomon v Salomon, uncanny personhood and the Jews1

Christopher Hutton

The House of Lords judgment in Salomon v A. Salomon & Co Ltd (1897) is one of the most famous decisions in English law. ‘Great cases’ of the stature of Salomon have a special kind of authority, which has led them to be dubbed ‘superprecedents’.2 A superprecedent demonstrates extraordinary generative power, and can be read as a microcosm of compressed meanings, compacted conflicts, and historical and social values. Under the flag of Salomon, modern company law has created beings of immense power and scope, potentially immortal, holding perpetual symbols in the form of trademarks, yet enjoying many of the rights and privileges of natural persons. But the canonical status of a superprecedent, its role as an unmovable anchor to an entire tradition of legal decisions and their associated social practices, requires that it be left undisturbed, and as a consequence that it be systematically ‘underread’. Salomon is seldom analyzed by economic or social historians, nor is it discussed in works of jurisprudence and legal theory. Company law scarcely figures in the writings of Marxist and other left-critical theorists of law,3 and the case has the kind of paradoxical invisibility that true celebrity can endow.

In their study of the reception of Lawrence v Fox (1859), an American case about the third-party privity in relation to a debt, Hoeflich and Perelmutter show how it was not until the 1960s and 1970s that it became a leading case ‘in the full sense of that phrase’ (1988: 734). In its time, Salomon was seen as a significant decision, understood primarily as clarifying the law in relation to so-called ‘one-man companies’. Yet Salomon has become a cornerstone in the development of the global capitalist system (McQueen 2009: 318).4 Talk in the 1970s and 1980s of the ‘gradual decline’ in the importance of this case and of the rise of the social and ‘soulful’ corporation run as part of a benevolently managerial and technocratic social order (Stanley 1988: 100) proved premature5 as deregulation, neoliberalism and increasingly abstract forms of value took hold in the world’s largest economies (Ireland 1999: 54).

The Salomon decision represented a crucial step in the creation of an autonomous company law, independent of partnership law (Ireland 1999). It affirmed that the company form would be available to businesses of very different kinds and scales, leading to the tension between legal and economic form, which persists to this day in company law. Salomon was a formalistic judgment, since it recognized no restraint on the application of a registration procedure beyond conformity with the requirements of that procedure itself as laid down by Parliament: ‘the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are’ (per Lord Halsbury, at p. 30). Indeed, the early reception of this case was often in terms of statutory interpretation.6

This chapter seeks to ‘overread’ the Salomon case, in order to contextualize it in nineteenth century debates about the company form and representations of the uncanny personhood of both companies and Jews. It argues that Salomon is in important senses a ‘Jewish case’, and that it reflects profound ambivalence within Western culture, as part of its Christian heritage, about the line between business morality and ‘excess’ and the tangled ‘jurisprudence of greed’ (Posner 2003).7

Salomon as the ‘one-man company’ case

The rule in Salomon is today understood in fundamental, one might say, ontological terms. In Lord Macnaghten’s famous words (Salomon v A. Salomon & Co Ltd 1897, at 51):

The company is at law a different person from 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 managers, and the same hands received 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.

For its contemporaries, however, the case was not about legal personality per se. It was the ‘one-man company’ case, in that it concerned the limited liability status of a business owned and managed by a single individual prior to incorporation (see [Comment] 1896, 1897). As Lindley LJ noted in the Court of Appeal (Salomon v A. Salomon & Co Ltd 1895, at 336): ‘Such companies were unheard of until a comparatively recent period, but have been very common of late years’. At the time of the Salomon case, it was not fully evident that the legal form of the company was open to a business effectively run by one individual, given that in such enterprises there was no real ‘separation of ownership and control’, to use a phrase made famous by Berle and Means ([1932] 1967).

Prior to the Joint Stock Companies Act of 1844, a parliamentary charter was required to set up a company. The limited liability of these companies was only recognized by the Limited Liability Act of 1855, then affirmed by the Joint Stock Companies Act of 1856. The first Companies Act, a consolidating measure, was passed in 1862. The ‘great monomania’ (Spearman and Farries 1865: 5) for the company in the mid-nineteenth century raised considerable public disquiet. Hostility to the company form can be traced back much further: the joint-stock company was a ‘Society of Artificers, who blow the Stock up and down, as best suits their design of enriching themselves by the ruin of others’ (White 1691: 5; Poovey 2008: 82). Adam Smith’s famous remarks in the Wealth of Nations ([1776] 2009: 439) on Joint Stock Companies still resonate:

The directors of such companies, […] being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery [partnership] frequently watch over their own. […] Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

One moral principle that has underlain opposition to limited liability and corporate personality is that those who stand to profit individually should also bear their individual share of the potential liability.8 The New York Times noted that the lower courts had delivered ‘actual and substantial justice […] without regard to any narrow technicalities’, but the House of Lords threatened to turn limited liability under English law into ‘unlimited authority to cheat’.9 However, the liberal-utilitarian view was that limited liability was a means of unleashing economic creativity and entrepreneurial energy (Rajak 2008: 5), a way to turn what was referred to as ‘the magic key of limited liability’ (Manson 1895: 188).

The case itself

Mr Salomon incorporated his business in 1892 as a limited liability company under the Companies Act of 1862, and in the process issued a secured debt or debenture to himself of £10,000. Though it has been argued that the price paid by Salomon & Co Ltd to Aron Salomon for the company was high (£39,000), a price of course determined by its managing director, Mr Aron Salomon, Salomon paid off all the creditors of the sole trader business prior to incorporation (Dignam and Lowry 2009: 18). The trustee for the new company was Adolph Anholt, Salomon’s wife’s nephew (Johnson 2010: 153). In a recent work Salomon is called an ‘unsavoury leather merchant’ (Micklethwait and Wooldridge 2003: 52), but there is no evidence that he engaged in any dishonest practice. The previously profitable company had been hit by labour unrest and strikes in the boot trade (Johnson 2010: 155). Even though the valuation of the company was inflated, ‘the creditors at the time of liquidation had only ever dealt with the business as company’, and Salomon transferred the debenture to a Mr Broderip in exchange for £5,000 to be injected into the ailing business (Dignam and Lowry 2009: 22).10 The question to be determined was whether, on dissolution, the debt owed by the company to Mr Salomon could be given precedence over debts owed to other creditors. The company, A. Salomon & Co Ltd, and the person, Mr Aron Salomon, were distinct entities in law, yet the company was his creation and, it was argued, entirely subject to his control. The other shareholders were family members who held only one share each, with the balance of the 20,007 shares being held by Mr Salomon himself. Although A. Salomon & Co Ltd was registered and formed entirely in accordance with the required formalities, with its seven members or shareholders, it was felt by many observers to be an abuse of the company form.

In the Divisional Court, Vaughan Williams J. found that Mr Salomon was personally liable for the debts of the company, on the basis that the company was his agent or ‘mere nominee’ (at 229).11 The fact that the agent in this case was a company and not a person made no difference to the nature of the relationship between the agent (the company, A. Salomon & Co Ltd) and the principal (Mr Aron Salomon). Just as an individual agent or servant would have called on the principal to meet business obligations that had arisen under the principal’s direct control, so the company could also call on the person running it to make good its debts. The relationship of agency between the company and its managing director made Mr Salomon personally liable. Though there was no question of fraud, the price which had been paid for the company was ‘exorbitant’ and there must have been ‘an implied agreement by him to indemnify the company’ (at 331).

In Salomon v A. Salomon & Co Ltd (1895), the Court of Appeal went further both legally and rhetorically, concluding that Mr Salomon’s wife and children held their shares on trust for him, and that the company was a trustee for Mr Salomon. The underlying (‘beneficial’ or ‘equitable’) ownership remained with Mr Salomon. Since Mr Salomon was in this sense the real owner, he, rather than the company or its shareholders as a whole, stood to benefit as an individual from its operations. By the same reasoning he was also personally liable to indemnify the company for its debts. In the judgment, a whole semantic field of epithets and allegations, including that the company was a ‘fraud on the creditors’ (at 328), were directed at Mr Salomon. For Lindley LJ, the company, was a corporation ‘created for an illegitimate purpose’ (at 337), it was ‘a trustee improperly brought into existence’ which Salomon used ‘to screen himself from liability’ (at 338). Companies formed in this manner were ‘mere devices’; Salomon had laid a ‘trap’ for the creditors; he and his advisors were ‘evidently very shrewd people’; such schemes did ‘infinite mischief’, bringing the statute into ‘disrepute’, by ‘perverting its legitimate use’. The sale of the business was a ‘mere sham’. The ‘scheme’ was ‘a device to defraud creditors’ (at 339). The shareholders merely assisted in the ‘scheme’ or ‘mere scheme’, which was ‘contrary to the true intent’ of the statute (at 340). In the judgment of Lopes LJ, the company’s incorporation was described as ‘in every respect perfect’ but it was a ‘mere nominis umbra’, a ‘cover’ for the sole-trader business. To allow this ‘scheme’ to succeed would be ‘lamentable’; it would be to authorize a ‘perversion’ of the Joint Stock Companies Act (at 341). In so doing the court would be ‘giving vitality to that which is myth and a fiction’ (at 341); this ‘ingenious device’ meant that the company would ‘consist of one substantial person and six mere dummies’ who had no ‘real interest in the company’ (at 341); the Act contemplated seven independent members with ‘a mind and a will of their own’, rather than being the ‘puppets’ of one individual (at 341). It would be a ‘scandal’ if this state of affairs were legalized (at 341). The sale was a ‘fiction’ and therefore ‘invalid’; the arrangements were ‘merely devices to enable him to carry on business in the name of the company with limited liability’ (at 341). Lopes LJ even expressed the view that the certificate of incorporation might be repealed. In concurring, Kay LJ noted that Salomon ‘must have had careful advice’ (at 342); this was a ‘pretended association’ (at 345); the sale of the company was an ‘utter fiction’ (at 345); the wife and children ‘were mere trustees’ (at 347). The fact that Salomon had sent up his company in a ‘perfect’ and ‘faultless’ manner so as to comply with the law was repeatedly held up as proof of a devious and scheming plot.12

Following the Court of Appeal’s tongue-lashing of his client, Salomon’s solicitor, Ralph Raphael, wrote to the Financial Times expressing dismay at the allegations of dishonest dealing by his client:

The Financial Times itself had been following the case closely. In an initial report it had spoken of a ‘Chinese puzzle in the boot trade’, implying that the network of ‘complicated’ family and business interests involved raised questions which the creditors would want answering.14 However, subsequent pieces affirmed Mr Salomon’s sound trade reputation. The paper cast doubt on the reasoning which had led the lower courts to conclude that the board was merely the passive instrument of Salomon’s will:

We must confess to extreme difficulty in following this line of argument. To the lay mind it appears much more probable that a member of the family would object to anything he thought wrong in the conduct of the business than an employee who had been made a present of shares – and was liable to dismissal.15

The widely held assumption that A. Salomon & Co Ltd was in fact, if not in law, a ‘one-man company’ rests on a particular reading of the family’s internal relations, in particular Salomon’s presumed status as unchallenged patriarch. The family has been presumed to be transparently the creature of Salomon’s will, and this has warranted a parallel reading of the company. However, Salomon gave pressure from his sons as one of his reasons for incorporation: ‘They troubled me all the while’ (Rubin 1983). This alternative reading makes Salomon more Lear than Shylock, a father who wished ‘To shake all cares and business from our age; conferring them on younger strengths, while we unburthen’d crawl toward death’ (King Lear, Act I: I). Taking this further, one scholar has sought to write Salomon’s wife, Mrs Schoontje Salomon, and her fragile legal subjecthood, back into the story (Spender 1999: 240):

The case of Salomon v Salomon & Co Ltd was the first significant recognition by the law of a company owned by a family. Yet the participation of the family was ignored. Aron Salomon was identified as the only human legal subject and the issue for consideration by the Court of Appeal, House of Lords and one hundred years of legal scholars was whether legal personality could be conferred upon the ‘one person company’.

The House of Lords unanimously reversed, on the simple basis that the company had been created according to the formal legal requirements. In fact, both lower court judgments logically rested on the principle of legal personality, since the company was in the one case determined to be the agent of Salomon, and, in the second, his trustee (Rajak 2008: 10). There was nothing in the Act that prohibited the kind of arrangement set up by Mr Salomon, and there was no fraud. Either the company existed in law or it did not. If it did exist as a legal entity – and there were no principled grounds for denying that it did – then the Act applied in a straightforward manner. The alternative was to leave the law in a state of confusion, with no clear criteria for distinguishing between a properly formed company and a fraudulent sham. The decision was welcomed by The Times for removing ‘obscurity’ from the legal rules:

Its massive historical reputation notwithstanding, one could define the ratio of Salomon in extremely narrow terms, as a decision in relation to an incorporated ‘one-man’ company, where the ‘one-man’ had caused himself to be issued a debenture in the form of a floating charge, thereby securing a place at the head of the queue of creditors – ‘however objectionable this may be’ (Lindley and Lindley 1902: 305).17 The New York Times was particularly exercised about the lack of a public register for debentures of the kind Salomon was holding.18 As Lord Macnaghten had noted in his judgment: ‘Everybody knows that when there is a winding-up debenture-holders generally step in and sweep off everything; and a great scandal it is’ (at 53). Following the Salomon decision ‘the virtual owner of the business cannot be made liable for debts contracted after its formation’ (Lindley and Lindley 1902: 160).19

Aron Salomon as Shylock

One intriguing aspect of the Salomon