life without salomon · salomon's case is, infact, so well ingrained inour sensibilities...

LIFE WITHOUT SALOMON

*Rob McQueen

INTRODUCTION

Life (at least for company lawyers) without Salomon's case seems inconceivable. It isgenerally seen as a landmark decision. Every British and Australian company lawtextbook refers to it as a key case in the development of company law. The story ofSalomon's case is, in fact, so well ingrained in our sensibilities that we all "know" (or atleast think we do) the story of the unravelling of modern company law and the crucialrole the decision by the House of Lords in Salomon v Salomon & Co Ltd1 plays in thatstory. We know the script so well that questioning the iconic status of Salomon's casewould seem to be a ludicrous exercise. Despite the seeming futility of such an exerciseit is the intention of this paper to suggest that re-examining some of our unquestionedassumptions may lead to some useful insights into the development of "modern"company law, and by inference, into a number of the problems (both theoretical andpractical) facing contemporary corporations law academics and practitioners.

THE IMPORTANCE OF BEING SALOMON-IN WHAT WAYS (IF ANY)WAS THE DECISION IN SALOMON'S CASE IMPORTANT?

Depending upon one's source, the monumental status of the House of Lord's decisionin Salomon v Salomon & Co Ltd is accorded either to its determination of the question ofwhether a company is truly separate from its constituent shareholders or alternativelyto its resolution in the affirmative of the legality of "one person" companies. Somecommentators have also pointed to the importance of Salomon's case in asserting anuncompromising literal approach to statutory interpretation.

No matter which of the above views of the significance of Salomon's case mightfinally be accepted, or even if all three propositions are accepted, the conventionalwisdom in respect to Salomon's case is that it is a landmark in the unravelling ofmodern corporations law. It is seen as part of a narrative history of corporations law in

1

BA LLB, DipEd, B Litt (Melb), PhD (Griffith) Senior Lecturer, School of Law and LegalStudies, La Trobe University. The author would like to thank the organisers of the specialSalomon Centenary Conference at ANU Law School in September, 1997 for a stimulatingand exciting forum within which to try out one's strange ideas on an unsuspectingaudience. The author would also like to acknowledge the generosity of Dr Simon Ville ofthe School of Economic History at A.N.U. in reading and commenting on the current paperin draft form.[1897] AC 22.

182 Federal Law Review Volume 27

which the decision itself is crucial. Removed from the cultural context in which it wasdecided Salomon' 5 case is seen as a vital moment in the unfolding of modemcorporations law: the House of Lords had, in its decision seen the truly modernimplications of the corporate law for the first time and entrenched that revelation inthe "seamless web" of precedent. The problem with such a neat narrative account isthat it places the judicial decision itself at the centre of these unfolding events andgenerally ignores the cultural, economic and social context in which the decision wasreached. Little is ever stated as to the antecedents of Salomon' 5 case, the prevalence orabsence of "private" companies in the company registrations taking place in GreatBritain beforehand, or the pre-existing commercial and judicial views on theseparateness of companies and their owners.

Even opponents of the Salomon case are complicit in the above form of narrativehistory. They attack the decision itself as a decisive moment in the development ofcorporations law: a moment in which the "true" intentions of the architects of the 1856and 1862 companies legislation were ignored. Otto Kahn Freund's piece in a war timeissue of the Modern Law Review is typical of the anti-Salomon genre.2 In this piece heregales the judges in Salomon v Salomon & Co Ltd for a litany of sins which he attributesto their commercial and practical ineptitude.

One of the purposes of this paper is to challenge these narrowly conceivednarrative accounts of the unfolding of modern corporations law in which the House ofLords decision in Salomon' 5 case is placed as a decisive event. Much recent criticism ofhistorical method has been aimed at precisely such forms of narrative history.3

In the instance of Salomon' 5 case, it will be suggested, its importance in theunravelling of modem corporations law, its landmark significance, is a "fact" whichcame after the event.4 There has been little attempt (at least by textbook writers or

23

4

a Kahn-Freund, "Some Reflections on Company Law Reform", (1944) 44 Mod LR 44.In his recent path-breaking examination of Australian history Paul Carter had cause tomake the following observations in respect to the limitations of narrative history:[In narrative history] it is not the historian who stages events, weaving them together toform a plot, but History itself. History is the playwright, coordinating facts into a coherentsequence: the historian narrating what happened is merely a copyist or amanuensis. He is aspectator like anybody else and, whatever he may think of the performance, he does notquestion the stage conventions ... In a theatre of its own design, history's drama unfolds;the historian is an impartial onlooker, simply repeating what happened ... Such history is afabric woven of self-reinforcing illusions. But above all, one illusion sustains it. This is theillusion of the theatre and, more exactly, the unquestioned convention of the all-seeingspectator ... This kind of history, which reduces space to a stage, that pays attention toevents unfolding in time alone, might be called imperial history. The governor erects a tenthere rather than there; the soldier blazes a trial in that direction rather than this: but, ratherthan focus on the intentional world of historical individuals ... empirical history of this kindhas as its focus facts which, in a sense, come after the event. The primary object is not tounderstand or to interpret: it is to legitimate ... I such a logic demonstrates the emergence oforder from chaos. (P Carter, Road to Botany Bay, (1987) at xv-xvi).The issue of the "factity" of another aspect of the narrative of modem company law, theiconic role of the Companies Act 1862 (UK), has been questioned by Shannon, one of thegroup of London Economics School based historians who re-wrote the history of modemcompany law in the 1930s:A text-book myth would give place of honour to the Companies Act of 1862...The Act of1862 was a consolidating and extending Act which brought no new important principles,

1999 Life without Salomon 183

jurisprudes) to understand or interpret the complex social and economic landscape inwhich the decision was made, it is simply described as a fact, just as the route followedby an explorer might be so described. Such landmarks, without emplacement in thechaotic social and economic milieu from which they emerged are as useless inachieving an understanding of the corporate form as a cairn in the middle of a cowpaddock is to understanding the process of colonialism.

Rather than Salomon's case dealing with a series of novel questions which wereunknown to practitioners before the 1890s it was instead true that most of the issuesdealt with in the Salomon decision had been the subject of vigorous public debate formany years before the case was decided. Many of these debates continued afterSalomon's decision. Indeed the decision can be seen as only one element in an ongoingseries of controversies that extend back at least as far as the Select Committee on theCompa~ies Act 1867 (UK). The status of one person companies, the degree ofseparation of a company from its owners, the intentions of the founders of moderncompany law, the appropriate role of the State in corporate regulation and a host ofother issues touched on by the Salomon case had been long debated in the commercialpress and before specialist parliamentary committees.

Also, when considering the iconic status of Salomon's case it is worth consideringthat the government of the day had before it, at the time of the decision, a series ofrecommendations in respect of reform to the Companies Act. Amongst theserecommendations was one which suggested recognition of "one person" companiesand the introduction of specific provisions in the Companies Act to provide for thedifferent responsibilities of such corporations with respect to matters such as balancesheets and other obligations to the Registrar of Companies. Thus, even if the finaldecision in the Salomon litigation had been different there was a high likelihood thatthe government of the day would nevertheless have acted to confirm the legitimatestatus of such enterprises. As Mary Rix has noted, too many vested interests dependedupon the legitimate status of private companies by 1897 for such enterprises to beoutlawed.5 Thus, even if Salomon's case had been differently decided it is axiomaticthat the legislature would have provided relief to private companies shortly thereafter.Indeed this may have been a preferable option as the decision in Salomon's case meantthe legislature could defer thinking seriously about a question which had alreadyplagued the deliberations of at least three Select Committees on the operation of theCompanies Acts: this being how to legislatively provide for what had already becomea de facto reality-the emergence of the private company. As Mary Stokes has pointedout one of the legacies of this period of indecision is a growing incoherence to thetheoretical underpinnings of "modern" company law.6 The growing theoretical "mess"of modern company law was compounded, rather than relieved, by the decision in

5

6

and although an outburst of company promoting took place in the cheap money marketwhich happened to follow it, its superiority over the Act of of 1856 was more legal thaneconomic...Neither The Economist or The Bankers' Magazine gave it editorial commentand Herepath's Railway Journal gave it only a few lines. (H A Shannon, "The First FiveThousand Companies" (1932) 2(3) Economic History 396 at 399).M Rix, An Economic Analysis of Existing English Legislation Concerning the Limited LiabilityCompany (1936) unpublished M.Sc (Econ) thesis, University of London.M Stokes, "Company Law and Legal Theory" in W Twining (ed), Legal Theory and theCommon Law (1986) 155.


Salomon's case and the belated statutory recognition in the United Kingdom of privatecompanies in 1907.

The fact that the legislature was "let off the hook" in having to resolve the questionof the nature and status of private companies allowed such enterprises to dominateregistrations under the Companies Act, rather than having them constituted andregulated under some more suitable and separate regime to that applying to publiccompanies. The preponderance of small enterprises dominating the company registermeant that sensible provisions on matters such as publicity of corporate balance sheets,more pro-active policing of companies by the Corporate Registrar, and so on, weredeferred for far too long. The long delay in dealing with the phenomenon of closecorporations in the English and colonial setting meant that ultimately neither theinterests of small business people nor those of the investors and lenders to largecorporations were properly served.

Instead of having a company law, which suitably balanced the needs of investors,lenders and promoters, late Victorian England had a legislative structure which wasboth theoretically incoherent and practically moribund. The infusion in late VictorianEngland of the principles and practices of partnership law into company law did notassist the overall development of English capital.

The resilience of small business in the United Kingdom meant that instead of beingregulated under a separate legislative structure, which combined limited andunlimited responsibility, small business instead colonised company law in the UnitedKingdom. As Simon Ville points out elsewhere in this volume, small capital in theUnited Kingdom was far more resilient than similar sized businesses in other parts ofEurope and in North America. The de facto recognition of small limited liabilitycompanies which became de jure in Salomon's case may, according to Ville, haveconstituted a serious constraint upon the growth of larger firms which would haveobtained much greater economies of scale and enabled English capital to much betterkeep up with its German and American rivals.7

The real problems with the hijacking of limited liability incorporation by smallertraders were structural in nature. At one level the favourable climate for small businessmay have prevented the emergence of larger enterprises with more efficientproduction techniques. It is also to be noted that the persistent failure of successivegovernments to legislate for the special needs of such undertakings caused a range ofproblems with the administration of the Companies Acts which may not otherwisehave plagued English company law and those systems that emanated from it.Deference to the interests of small businesses, with their understandable desire forprivacy, prevented the introduction of publicity provisions into English company lawfor far too long. The decision in Salomon's case thus arguably exacerbated a number ofpre-existing problems in English company law and its administration and gave thelegislature an excuse for not acting on the recommendations of a succession ofspecialist committees which had urged greater government involvement in thesupervision of corporate citizens.

7 S Ville, "Judging Salomon: Corporate Personality and the Growth of British Capitalism in aComparative Perspective", this volume at 214-215.


THE INTENTIONS OF THE FOUNDERS OF MODERN COMPANY LAW

One of the propositions for which Salomon stands is that a literal approach should betaken in interpreting legislative instruments, the intention of Parliament or thoseresponsible for the legislation is simply irrelevant. Of course, this doctrine of statutoryinterpretation is now out of favour, but for a long period after Salomon's case it heldsway. In a number of colonial outposts of the British Empire Salomon's case was citedas the leading authority supporting the literal approach.8

Obviously, by taking a literal approach to the Companies Acts the House of Lordspre-empted any speculation as to whether small companies were or were not intendedby Robert Lowe and other leading proponents of the 1856 and 1862 Companies Acts tobe embraced by the legislation. What they intended was simply irrelevant, as long asthe formal requirements of the legislation were conformed to then a company could beregistered and have the same validity and status as any other company. The size of theenterprise, or the manner in which the subscribers held their shares (beneficially forsomeone else or otherwise) was irrelevant.

A number of legal and economic historians, despite the apparent legal irrelevanceof the intentions of the founders of "modern" company law, have neverthelessconjectured on the prevailing attitudes towards "one person" co~panies at the time ofthe enactment of the 1856 companies legislation. Most have asserted that the principaladvocates of the legislation were indeed hostile to the notion of small "one person"companies being embraced within the purview of the legislation. Kahn Freund, feltthat the acceptance in Salomon's case of the legitimacy of one person companies was a"perversion" of the intentions of the founders of modern company law. Ireland, in hisrecent and influential account of the history of company law in the nineteenth century,has also asserted that the intentions of the proponents of a general system of limitedliability companies legislation were that this new right should be confined to largerpublic undertakings.9 Ireland contends in his analysis of the legislation that at leasttwo of the "founding fathers" of modem company law, Robert Lowe, the (Deputy)President of the Board of Trade in 1856 and Henry Thring, who was an adviser to theBoard of Trade on the drafting of the Companies Act 1856, (UK) and the author of oneof the first company law textbooks, were both hostile to the notion of the legislationbeing used to incorporate smaller enterprises.

In his speech introducing the 1856 legislation to the House of Commons, Loweasserted that one way of dealing with the difficult and vexed question of liability in thecase of private partnerships would be:

[t]o carry the present law of limited liability into these partnerships, and to say that anynumber of persons, however small - even to one ... shall be entitled to be formed into acorporation, and to enjoy, as such, the privilege of limited liability. To that proposition Iam not disposed to accede ... everything would always be said to have been. done by the

8

9

For example, Rielle v Reid (1899) 26 OAR 54, the first Canadian case in a superior court tocite Salomon's case. Though perhaps a more interesting aspect of this case is the holding bythe court that even the formation of a company in circumstances where the predecessorincorporated business was insolvent was permissible-not necessarily a proposition thatSalomon's case stands for, particularly in circumstances where the formation of the newentity is fraudulently intentioned to defeat the claims of creditors.P Ireland, "The Rise of the Limited Liability Company" (1984) 12 International Journal of theSociology ofLaw 239.

186 Federal Law RevietV Volume 27

corporation and nothing by the individual, and a door to vexation, quibbling, and perjurywould be opened which it is most desirable to keep closed.10

Ireland also cites Thring's view that the legislation was only intended to apply to largeundertakings, and that small undertakings were intended to be covered by thepartnership law, as inadequate as that regime might be in catering for their needs:

Those responsible for the legislation continued to assert its restricted ambit. HenryThring ... in 1856 published a guide to the Act which provided further insights into theofficial view of its scope Thring expressed regret at the failure of the PartnershipAmendment Bills, because given the privileges bestowed by the 1856 Act, it seemed"somewhat unreasonable to refuse to the ordinary trader the privilege of obtainingmoney from capitalists ... without at the same time incurring all the risks of unlimitedliability·ll

However, despite these strong statements of intent the matter is not so simplyresolved. Lowe in particular is not an entirely reliable witness. Whilst he no doubt wasof the view that the Companies Act should not be used to incorporate smallundertakings, he also was of the view that it was not up to the State to prohibit suchincorporations. It was a matter for commercial actors to work out what would andwould not be regarded as acceptable within the formal limits provided for by the newlegislation.

The implications of the liberal tenor of the legislation were commented upon byanother prominent legal practitioner of the period, and a one time witness to the RoyalCommission on Mercantile Laws, Edward Cox, K.C. In the company law handbookauthored by Cox, and published in 1856, it was stated that the apparent injustice of thelegislation in excluding small partnerships and sole traders from the privilege ofincorporation was merely an illusion as the sole trader could incorporate.by"dummying" the six additional shareholdings, using friends, servants or relations.There was nothing illegal or contrary to law in so proceeding, Cox assured hisreaders.12

Lowe and others were well aware that such a "loophole" existed in the legislationwhich would permit small as well as large undertakings to incorporate. Despite thisrecognition of the possibility of small enterprises using the legislation in this way nospecific provision was introduced into the legislation to prevent such a contingencyfrom occurring.13 The ambiguity of the Act as passed, and Lowes' awareness of this isdisplayed in the following exchange in the House of Commons at the committee stageof the debate on the legislation:

101112

13

Hansard, 3rd series, vol.140, 1/2/1856, col 113.P Ireland, above n 9 at 243-244.E Cox, The New Law and Practice of Joint Stock Companies, (1856), i-xx; see also theserialization of Cox's manual in the Law Times (1856).As we have seen above Ireland contends in his analysis of the legislation that both theparliamentary draftsman responsible for the legislation, Henry Thring, and Robert Lowewere opposed to the extension of the legislation to smaller enterprises: P Ireland, above n 9at 243-244.


Mr. Henley said that he could not understand why the advantage of limited liabilityshould stop at the mystical number of seven, or why it should not be extended to six oreven down to one.

Mr. Lowe said that the object of the Bill was not to give limited liability, but toincorporate companies. When the Partnership was very small the Acts of Parliamentwere apt to become ambiguous.

Mr. Alexander Hastie said he would point out a case to the attention of the Committee.Suppose the case of a person forming a company of seven, consisting of himself and sixothers-it might be his servants-to whom he gave a single share. He could not think itright to give limited liability to a company when the right was liable to such abuse.

Mr. Lowe replied that the "same objection applied to the existing law. He could not agree to anychangen•14 (emphasis added)

The entire tenor of the legislation was permissive and it was intended as such. Lowe, inanother part of his speech when introducing the legislation, asserted strongly thatlimited liability legislation should be thought of as a right, rather than as a privilege, andas such it was merely another aspect of the principle of:

[f]reedom of contract, and the right of unlimited association-the right of people to makewhat contracts they please on behalf of themselves, whether those contracts may appearto the Legislature beneficial, or not, as lon~ as they do not commit fraud, or act otherwisecontrary to the general policy of the law.1S'

What this means in terms of the intentions of the founders of modern company law,those responsible for the enactment of the Companies Act 1856 (UK), is that whilst theymay have envisaged that the legislation would primarily be used to facilitate largescale enterprise it was not inconceivable to them that smaller enterprises would alsouse the legislation. It was really a question of permissiveness, with the market workingout what was acceptable or appropriate and what was not.

Lowe's extreme liberalism was also evident in the subsequent Select Committees of1867 and 1877 on the Companies Act. In the latter Select Committee, despiteconsiderable evidence of growing numbers of small, partnership-type undertakingsincorporating under the legislation, and a public clamour to do something about it,Lowe (by this time Viscount Sherbrooke) led the Committee in recommending that nofundamental change was required:

Viscount Sherbrooke [Robert Lowe] moved a Resolution which recited the success oflimited liability incorporation overall but noted the number of failures which hadoccurred. He however considered that the only remedy against loss in these, as in allmatters of business, is that a man before he parts with his money or pledges his creditshould inquire carefully into the nature of the undertaking, and the character and creditpecuniarily and morally of those with whom he is to be associated.16

The problem with determining the intentions of the founders of company law is thatthe answer to such a question cannot be wrenched out of context. To simply cast thequestion in terms of whether they intended small companies to be able to registerunder the Companies Acts or not is to ignore the tenor of the debates around thelegislation. The principal issue for someone like Lowe was to introduce a piece of

141516

Hansard, 3rd series, vol. 142, 26/5/1856, cols.642-643.Hansard, 3rd series, vo1.140, 1/2/1856, co1.129.Report of the Select Committee into the Operation of the Companies Acts 1862 and 1867, B.P.P.VIII, 1877, 425.


legislation whereby commercial interests could determine such questions forthemselves. Lowe believed the State should play no role in resolving such matters forbusiness interests (it shouldn't be forgotten that later in his career whilst Chancellor ofthe Exchequer he went so far in pressing for a small State that he advocated the totalabolition of income tax). It was up to them and them alone to establish what waspermissible within the confines of the legislation.

THE COMPANY AS A SEPARATE LEGAL ENTITY BEFORE SALOMON

Even those opposing the introduction of a general system of limited liabilityincorporation in the 1850s considered that the introduction of such a system wouldlead to the corporate entity having a separate and independent existence from thosewho held shares in the undertaking:

As William Entwhistle, a banker representing the Manchester Commercial Association,and strident opponent of change, neatly put it, the choice on offer was between whether'we deal and ought to deal, with men as individuals and not with an abstraction calledcapital, which we are thus called upon to recognize as possessing a separate and independentexistence'. It is argued in what follows that this distinction, between a world fit forindividual capitalists and a world fit for social capital, was the axis on which the debateturned, a debate over, and a choice between, different theories of political economy.17

As the new enterprise form began to "take off" the daily press asserted that Englandwas becoming "one vast mass of impersonalities"18 and the legal press noted that thislaw (the Companies Act) had effectively enacted that "a man shall not pay his debts,perform his contracts or make reparation for his wrongs".19 The implications of theseparateness of these corporate "impersonalities" was certainly not lost oncontemporary "men of commerce" in the 1850s and 1860s.

The implications of adopting such a principle of association was also not lost onsocial commentators of the day. Indeed, one of the core facets of the social commentaryunderlying Charles Dickens most popular novel of the period, Little Dorrit,20 is thecounter-positioning of a society in which moral decay is endemic and in whichbusiness and personal relationships are becoming more and more anomie with asociety in which community is still in the ascendant and relationships betweenbusiness partners and individuals is still based on mutual trust. The title of Dickensworking draft for the novel was Nobodies Fault,21 a title which tends to underline thenotion that joint stock enterprise created impersonal entities in which the fixation ofblame, both morally and legally, was nigh on impossible to achieve. The relevance ofthe joint stock company as a metaphor for Dickens in respect to the disintegration of a

17

18

192021

R A Bryer, "The Mercantile Laws Commission of 1854 and the political economy of limitedliability", (1997) 1 Economic History Review 44.Times, (1865) cited in B C Hunt, The Development of the Business Corporation in England 18001867, (1936) 145-146.Law Times, 25/3/1858, 14.C Dickens, Little Dorrit, (1980 reprint).For an extended discussion of Dickens moral purpose(s) in the novel and their relationshipto notions of "liberal guilt" see: D Born, The Birth of Liberal Guilt in the English Novel (1995) at29-30; 40-42. For another approach to the moral concerns of Victorians in regard to thegrowing depersonalisation of bu~iness see B Weiss, The Hell of the English: Bankruptcy andthe Victorian Novel (1986).


world in which "community" obligation and individual ascription of responsibility wasin the fore is also underlined by the years in which Little Dorritt was written-between1855 and 1857, precisely the period in which the introduction of a general system oflimited liability incorporation was being vigorously debated in Parliament and thepress.

In the novel the machinations of Merdle, the promoter of joint stock companyschemes, are presented as the epitome of everything Dickens saw as bad in theemerging post-Crimean war environment-a society in which economic loss andmoral decay was "nobodies fault" and in which community was constantly underthreat from rampant atavism. The joint stock company is seen as a metaphor for allthat is awry with this new social climate. Merdle and his associates due to theimpersonality of their undertakings neither knew or cared about the thousands ofsmall and medium investors who put money into their schemes, or about the creditorswho ha~ advanced the enterprises money or goods on credit.

In contrast, the personal obligations felt by Arthur Clennam towards his co-partnerDoyce, and to his creditors is seen as a creditable; even though Clennam faces personalruin, he does so with his character (in the Smilesean sense) intact.22 Indeed thedilemma of the fictional Clennam provides an interesting contrast to the real-lifedrama, some 40 years later, of Aron Salomon, whose failure to "adhere to the moralpractices of the boot trade led to his excoriation in the Boot Trade Journal23 and byfellow businessmen in the trade. Gerry Rubin has provided us with a real sense of themanner in which the impersonal imposition of Salomon Pty Ltd between AronSalomon and his creditors was seen as a moral as well as a legal question by hiscompatriots in the trade.24 He had just as clearly failed the test of character as thefictional Arthur Clennam had passed it.

Neville Feltes25 has provided an insightful account of the manner in which Dickens,George Eliot and other novelists of the period considered the ascendance of that newabstract legal person, the company, as a key symbol for the displacement ofcommunity obligation and personal responsibility by atomism and atavism in thesocial structure. Feltes suggests that the partnership form of structure was indeedrelated to deeply held beliefs in relation to personal responsibility towards thecommunity to which one belonged.

It is clear beyond a doubt that whilst many contemporaries of Dickens, evenamongst the legal profession, would not have been able to describe the full

22

23

2425

A reference to Samuel Smiles (1812-1904) who was one of the most influential critics ofbusiness life in the Victorian era and whose book, Self Help (1859), was one of the largestselling texts of the nineteenth century. Smiles argued that in business ,"character" waseverything. According to Smiles it was a moral failing of the largest order to sacrifice"character" in order simply to be successful. Smiles was aghast at many of thedevelopments of the later Victorian era, especially the growing impersonality of businessand the consequent moral decay which he perceived as a consequence of the extension ofcompanies into all walks of business life.See the reponses to Salomon's actions in the Boot Trade Journal as cited by G Rubin, "AronSalomon and His Circle" in J Adams (ed), Essays for Clive Schmittoff (1983) 99.Ibid.N Feltes, "Community and the Limits of Liability in Two Mid-Victorian Novels", (1974)June Victorian Studies 355.

190 Federal Law RevieuJ Volume 27

implications of the separateness of companies from their shareholders and directorsthey nevertheless had a good idea that the company form meant that the nature ofobligations in business transactions had fundamentally altered from ones which werealmost totally reliant on bonds of obligation between individuals to ones in whichimpersonal actors dealt with each other at arms length: caveat creditor was now theorder of the day.

It is also clear that the implications and possibilities of this new world ofimpersonal transactions between legal fictions was not lost on company promoters andthose in command of troubled businesses. From the 1860s onwards many promoterspushed shares in conversion companies, which were generally long establishedpartnerships on the decline converted to limited liability companies. The idea was toattract investors to these enterprises on the basis of their status as establishedbusinesses and public familiarity and regard for the name of the firm. Whilst some ofthe businesses so converted simply needed an injection of new capital and were soundat heart a number of other businesses so converted were, at the time of theirconversion, already bankrupt.

An investment manual of the late nineteenth century captures the prevailingattitude towards conversions when he states to his readers:

Look with suspicion upon companies, and especially upon private firms converted intopublic companies. The majority are over-capitalized, or are converted because latterlythey have become unprofitable, the machinery has become antiquated or fashions havechanged. The conversion also usually takes place at a time of general inflation in prices,and it is afterwards found that the concern has been taken over at a price far above itsvalue.26

The same sort of concerns had been expressed by the prominent promoter, DavidChadwick, in his evidence to the Select Committee on the Companies Act in 1877. Hehad suggested to the committee that as many as 39 out of every 40 conversions were infact, businesses on the downgrade. Shannon adds a gloss on Chadwick's evidence:

The arithmetic is perhaps specious, but its lesson is clear. Partnerships which saw littlechance of passing on their liabilities to the public would be tempted to make the transferto their creditors, especially as the issue of judicious use of debentures could enable themto sweep back into their own pockets assets that could have gone to their creditors.Where creditors continued to trade with the same people, once partners, nowshareholders, they could only look to the limited company for payment.27

The second decade of the operation of the Limited Liability Act began with thedramatic collapse of the recently converted financial house, Overend Gurney Ltd. Thiswas the first instance in which the courts, parliament and the public were required tocome to terms with the possibility that the limited liability form could quitedeliberately be used to avoid debts, even if they were colossal. This was not theprincipal issue in the Overend Gurney case itself as, even though the company was alimited liability company, the shares had been issued with large amounts of unpaidcalls, leaving the ordinary shareholders to bear the brunt of the losses rather than the

26

27

Anon., Counsel to Ladies and Easy-going Men on Their Business Investments and CautionsAgainst the Lures ofWily Financiers and Unprincipled Promoters (1892) 41.HA Shannon, "The Limited Companies of 1866-1883" (1932) 4 The Economic History Review,1st series, 303.


creditors. However, it was also clear that in only slightly different circumstances itwould have been the creditors who bore the losses of Overend Gurney Ltd.

The implications of the separation of the company from its progenitors was not loston those involved in commerce and the finance sector. Even a brief scrutiny of thepages of the financial press of the time makes it clear that the full implication of theseparation of a company from those behind it were apparent to contemporaries of theOverend Gurney collapse.

This was possibly the first time the full implications of a totally unregulated right toregister as a limited liability company without scrutiny by any state department, andwithout any attendant publicity concerning the financial aspects of the concern beingfloated, were brought out in the open, and subjected to public debate. It also provideda major impetus for re-examining many aspects of company flotation which hadbecome ritualized during the first decade of operation of the Act. In particular thepractice of floating companies with large amounts of capital at call was now seen to bea pernicious practice. New flotations rarely followed this practice after 1867 andexisting enterprises were allowed, after an amendment to the Companies Act in 1867,to reduce their capital and thereby provide existing shareholders with the ease ofknowing they had fully paid shares. This was necessary in order to prevent a massexodus from company investment after the debacle of the Overend Gurney float.

The litigation which followed the collapse of Overend Gurney Ltd, was principallycentred on the moral and legal dimensions of members of a pre-existing enterprisefloating that undertaking at a time when they knew it to be bankrupt. The key legalquestion was whether such practices amounted to fraud. An aggrieved shareholder ofOverend Gurney Ltd, a clergyman, brought a private prosecution against the directorsof the company alleging fraud on these grounds.28 Despite what appeared to be astrong case against the directors of Overend Gurney Ltd. for fraud they were acquittedby the Queens Bench of the charges. The bench took the view that the directors of thecompany who were charged with fraud could only be convicted if members of the jurywere satisfied that the misrepresentation of the liquidity of the firm contained in theprospectus of the public company was both known as such by the defendants, and thatthey had an intention to defraud when they issued the prospectus.

For many witnesses the defects of the legislation exposed by the crash of 1866 werenot remediable by minor amendments to the statutes, but rather would only beovercome by means of the wholesale rejection of the model which had formed thebasis of the 1856 Act. Some witnesses argued for a return to the fundamentals of the1844 legislation,29 others suggested an adoption of the continental system wherebydirectors were fixed with unlimited responsibility,30 and some suggested that theregulatory model which operated in respect to Friendly Societies could also be applied

2829

30

This prosecution is unreported. It is referred to in Peek v Gurney (1871) 13 Eq 79.Retorting to Lowe's claim when he introduced the 1856 legislation that individual vigilancewas the only sure method of regulation, the Master of the Rolls, Lord Romilly, and the ViceChancellor, Page Wood, stated to the 1867 Select Committee that "it is not sufficient to saythat because a man is a foolish person, therefore he must be allowed to ruin himself in hisown way". (Select Committee on the Operation of the Limited Liability Act, B.P.P. 1867 (329) X,Q.1394).Be Hunt, The Development of the Business Corporation in England 1800-1867 (1936) of the 1867Select Committees deliberations in this regard, 153-159.


to limited liability companies.31 Lord Romilly was particularly critical of the modelactuating the limited liability legislation of 1856 and 1862. He suggested that theliability of directors in joint stock companies should be unlimited, just as was the casewith gerants in continental joint stock enterprises. Romilly on being further quizzed bythe Committee as to his general views on the legislation asked the rhetorical question:"[w]hat I wish to know is ... what are the benefits produced by the Act", and thencontinued "the evil [produced br: the Act] is really harrowing. The amount of calamityit causes is quite extraordinary". 2

The common factors animating the views of many witnesses were:(i) that the Registrar of Companies and/or the Board of Trade should playa far greaterrole in vetting of applications for registration under the Limited Liability Act and inensuring that companies, once registered, complied with the Act; and(ii) that far greater publicity of the financial aspects of a company's activities wasrequired. In particular an annual balance sheet in common form should be available tocreditors and shareholders.

In respect to the first of the above matters, one of the clearest statements in supportof the need for the Registrar to play a much more pro-active role in the pre-vetting ofapplications for registration was made by Swinton Boult, a lawyer involved in financeand insurance in Liverpool. Boult considered that the immense degree of fraudoccurring under the Acts could only be overcome by having the Registrar ofCompanies conduct a preliminary enquiry into every company applying forregistration. Boult continued:

My impression is that a great many objects for which companies are formed now are notat all fit objects for companies to undertake, and would not be undertaken with a bonafide intention, and that those are the very companies which lead unsuspecting people,and people of small means, and ignorant people, into trouble, and that so long as the lawexists in its present state, some means should be found to give these people a protectionwhich they are utterly unable to find for themselves.

Q. I presume that you have in your mind the protection which is given under theFriendly Societies Act to the formation of friendly societies?A. Yes.33

In 1844, Gladstone had declared that in order to show up roguery all that was requiredwas publicity.34 This idea had been derided by Robert Lowe in 1856 as hollowrhetoric.35 Now, in the wake of a major crisis of public confidence in the limited

31

32

33

34

35

Evidence of George Latham Browne, Esq., Select Committee on the Operation of the LimitedLiability Act (1867).Evidence of Rt. Hon. John Lord Romilly, Select Committee on the Operation of the LimitedLiability Act (1867) Q.1325; 1328.Evidence of Swinton Boult, Select Committee on the Operation of the Limited Liability Act (1867)Q.1693; 1707; 1711-1712.William Gladstone, in introducing the 1844 legislation stated to the House of Commons:"Publicity is all that is necessary. Show up roguery and it is harmless" (Hansard, 3rd seriesvol. 75 (1844) col. 277)Lowe remarked in regard to the capacity of the restrictive provisions of the 1844 Actproviding effective protections for the public that "it is quite impossible by any legislationthat we can devise really to protect the public in matters which they are fully able toprotect themselves". Hansard, 3rd series, vol. 139, 1/2/1856, col. 121. He remarked,


liability principle, Robert Lowe's position was beginning to appear indefensible.Nevertheless Lowe continued to defend that position. As a member of the 1867 SelectCommittee he grilled witnesses who suggested that publicity and greater Stateresponsibility for regulation would result in a better class of corporate entities andprovide greater protection for the creditor and investor. George Latham Browne was aparticular target of Lowe's impatience with those who regarded publicity as aworkable principle. Browne had suggested that publicity of a company's affairs was ameans of protecting the ignorant. Requiring enterprises to provide a public balancesheet was not an illegitimate interference with their freedom to trade. Brownecontinued: "you must remember you are giving them a privilege [limitedliability] ...and because you are giving them that privilege you have a right to put themunder special restriction".36 Lowe then tersely asked Browne:

Q. [Lowe] Do you think you could enforce that law?

A. [Browne] You could make it compulsory.Q. [Lowe] Yes: but do you think that you could enforce it?37

Later in evidence Lowe again returned to the attack in response to Browne's furtherheresy in advocating that officials in the Board of Trade should be responsible forchecking various aspects of the affairs of newly registering companies before they begranted a registration certificate:

Q.[Lowe] Don't you think that by requiring public officers to do all the checking inrespect to the bona fides of an enterprise you would thereby put to sleep all privatevigilance?

A. [Browne] I do not think that it could do so more than at present.38

Despite the expressed desire of many witnesses for a return to the system of 1844, orsome other system built on the twin principles of publicity and state regulation, thetangible results of the 1867 Committee's deliberations were slender. The mainlegislative result was the introduction of provisions which allowed companies toreduce their capital. Without such reductions many companies were unable to paytheir shareholders dividends due to the substantial losses of capital they had sufferedin the 1866 crash. They also had difficulty raising borrowings due to their apparentlyextremely low earning rates.39

The amended Act, however, did not include any new publicity provisions, nor didit augment the administrative responsibilities of that "living Act of Parliament", theRegistrar of Companies. As has been noted in one commentary on the SelectCommittee of 1867 there was little relationship between the bulk of the evidence given

36

373839

however, later in his speech that the only way in which the legislature could legitimatelyinterfere in the operation of such enterprises was by requiring "the greatest publicity to theaffairs of such companies, that everyone may know on what grounds he is dealing" (Ibid,col. 131). The legislation of 1856 of course provides no such means by which activities ofjoint stock companies (eg the balance sheet) might be publicised.Evidence of George Latham Browne, Esq., Select Committee the Operation of the LimitedLiability Act (1867) Q.1233Ibid at 1264-1265.Ibid at 1279-1281.W R Cornish and D de N. Clark, Law and Society in England 1750-1950 (1989) 258.

194 Federal Law Revieto Volume 27

by the witnesses to the Committee and the recommendations that were made by theCommittee.40 Cottrell has noted in a similar vein:

Little of the factual evidence of the substantial incidence of abuse and near-fraud duringthe 1860s financial boom made any impact upon members of the Select Committee ... Thecommittee merely supported the proposals of Chadwick's pressure group regarding theability to reduce nominal capital, to subdivide shares, and to issue bearer shares ... Thereason for such an outcome is not difficult to establish. The Committee contained a large'City' contingent amongst its membership, some of which, in particular Goschen and G GGlyn, either knew personally or had business connections with Drake, Newmarch andChadwick.41

Enshrined in the recommendations of the 1867 Select Committee was the argumentmade at the time to explain the need to exercise caution in relation to the introductionof publicity provisions - that too drastic a reform of company legislation would erodeinitiative amongst the business community. This rationale for not taking too pro-activea stance in relation to corporate regulation has ever since regularly recurred in reportson corporate law and business regulation as the philosophical basis for doing nothingto strengthen the powers of the State vis a vis corporations. In this regard it has beensuggested in one recent account of the history of business regulation in England that"the overriding principle on which the regulation of 'fraud' has been based has beenthat at all costs, 'free enterprise' must not be discouraged by fear of prosecution".42 Or,as Lord Romilly put it in his evidence before the 1867 Select Committee, "it is verydifficult to know how one can introduce fetters upon the evil without introducing alsoimpediments to the good" .43

To return to Salomon v Salomon & Co Ltd, it is clear that this was not the first case todiscover the full implications of the separation of a limited liability company fromthose who were directors and members of the company. The implications of thisseparation had been apparent to most in commercial and legal circles since theOverend Gurney collapse and the subsequent litigation around that collapse. Eventhough the Overend Gurney matter involved a public, as distinct from a private,company conversion the principles enunciated in Salomon's case were all squarely inplace in 1867. The court in the Overend Gurney litigation had, in what was an evenmore blatant case of converting an enterprise on the downgrade than was the case inthe Salomon litigation, held that the promoters in such a case were not by reason of theconversion alone guilty of fraud. Registration of a company under the Companies Act

40

414243

M Rix, above n 4 at 10. However, compare Rix's assertion with the position advanced byG Todd, "Some Aspects of Joint Stock Companies 1844-1900" (1932) 4 Economic HistoryReview, 1st series, 46 at 63-64 who states that a number of witnesses before the SelectCommittee considered the effects of the Acts were almost wholly good. Even though Toddacknowledges that a number of other witnesses regarded the growing incidence of fraud incommerce as related to the introduction of limited liability incorporation he considers thisas of marginal interest as:[T]he problem of fraud cured itself in the next ten years. when the limitation of liabilitybecame effective...a better and more efficient classes of entrepreneurs grew up. As a resultthe standard of commercial morality was raised and fraud decreased (at 64).P L Cottrell, Industrial Finance at 61.M Levi, The Phantom Capitalists (1981) at 159.Evidence of John Lord Romilly, Select Committee on the Operation of the Limited Liability Act(1867) Q.1325.


was merely a matter of satisfying the formalities required by the legislation, and uponregistration the new corporate entity, rather than the individuals behind the enterprise,was the responsible body to creditors. If shareholders had large amounts of unpaidcalls on their shares then these could be drawn upon, but it was the company and thecompany alone which was now responsible to creditors, and as such it was up to thecreditors to ensure their position when an enterprise converted from a partnershipwith unlimited liability to a company with limited liability.

It was also clear from the deliberation of the Select Committee of 1867 that theliberal view which had prevailed in respect of the operation of the limited liabilitycompany legislation at the time of its enactment in 1856 still prevailed. Despite calls forthe prohibition of one person companies by a specific legislative provision oralternatively by de facto means, such as requiring detailed audited balance sheets fromall companies registered under the Companies Act (thus rendering it cost inefficient forprivate companies to register), nothing happened. The Companies Act retained thepermissive tenor which had characterised it at the time of its enactment. In addition toleaving it up to commercial actors to deal with the implications of this permissiveness,such as the separation of the owners and controllers of an enterprise from theenterprise itself, the extreme liberalism of the period also did nothing to prevent thesteady growth in the numbers of "one person" companies registering under theCompanies Acts.

THE PERMISSIBILITY OF "ONE PERSON" COMPANIES

As we have noted from the 1860s onwards more and more small private companiesbegan to appear on the Register of Companies. Despite fairly common awareness ofthe existence of these entities both within and outside the business community little ornothing was done to prohibit such registrations.

In the period immediately after the House of Lords decision in Salomon v Salomonthe main aspect of the decision emphasised by contemporaries as crucial was itslegitimation of "one person" companies.44 The ambivalence of Parliament to enactlegislation one way or the other and the prevarication of the various Committees set upover the years to determine, amongst other things, the need for legislative recognitionof one person companies was now a thing of the past. If Salomon was regarded bycontemporaries as a landmark it was largely by reason of its determination of thisquestion.

44 However note the discussion of the decision and subsequent developments in M Rix, aboven 5 at 60-61:The mere fact that private companies existed-and without being challenged-long beforethey were recognised by law is sufficient indication that the legal recognition of privatecompanies was not a pressing need (what may have been wanted, however, and what wasnever granted was legislation expressly designed to adapt the principle of limited liabilityto small business. The separate recognition of private companies was not then due to anydire necessity; such companies already existed in large numbers, when threatenedlegislation intended to apply to all companies registering under the Acts, called forth sucha protest from businesses considering they had a right to act secretly, that the definition ofprivate companies was asked for so as to escape the liabilities proposed by the newlegislation.


However, even before Aron Salomon's business had run into problems their had beena de facto recognition amongst those in the commercial community as to the legitimacyof one person companies. The numbers of small private companies registering underthe Companies Act had gradually increased during the 1860s and 1870s only tobecome a veritable flood by the 1880s and 189Os. The numbers of private, conversionand public companies registered in the decades preceding the decision in Salomon'scase are detailed in Table One below.

TABLE ONE

REGISTRATIONS BY TYPE OF COMPANY AND YEAR

YEAR PUBLIC PRIVATE CONVERSION TOTAL1856 63 2 10 751866 59 7 7 731876 59 11 36 1061886 105 10 47 162

TOTAL 286 30 100 416

These figures indicate a slow but steady increase over time in the numbers of bothprivate and conversion companies registering under the Companies Act. There is asharp increase in the numbers of such enterprises as a percentage of total registrationsin the 1870s and 1880s. The principal reason for this steady increase was no doubtadvice given to business people by their accountants and lawyers. One of the principalcruxes of such advice would have been that such an organisational structure wouldpermit smaller enterprises to use the then new form of security-the floating chargewhich would both cut costs and allow considerably more flexibility to the "partners" insuch enterprises in financing modernisation, expansion and diversification of theirbusinesses.

Richmond and Stockford have conducted an exhaustive study of 1000 companiesregistered under the Companies Acts of 1856 and 1862. Using their figures we canobserve trends in private company registrations during the 1860s and 1870s.45 Smallnumbers of such enterprises were registered throughout the period 1856-1863,followed by a large increase in registrations of such enterprises during 1864. Thisincrease in registrations of private companies was maintained during the first half of1865. Many of these enterprises were conversions of existing family businesses.Conversions were quite often an attempt to revitalise a family firm which hadexhausted family financial reserves or managerial talent. Such enterprises sought acompromise solution to their particular problems, one which would allow them todraw on a wider pool of capital or talent but which would not necessitate them "goingpublic". As we have also seen, a small but nevertheless significant number of theseconversions were of enterprises on the decline. The managers of such undertakingswere either hoping that an injection of new capital would save the enterprise, oralternatively that by "going public" they would be able to avoid the humiliation and

45 L Richmond and B Stockford, Company Archives: The Survey of the Records of 1000 of the FirstRegistered Companies in England and Wales (1986).


acrimony associated with bankruptcy. In 1866 The Annual Register commented on thegrowing numbers of conversions figuring amongst company registrations:

The limited principle has developed in a somewhat novel direction. Instead of beingapplied to new undertakings, it is in many cases directed to the conversion of old privatefirms into companies [by] absorption of the ori~lhouse with the infusion of new bloodinto the management and an extension of capita1.46

With the dramatic failure of the large merchant banking house, Overend Gurney Ltd.in 1866, a conversion which had "gone public", the numbers of private companyconversions appear to drop in line with the overall decrease in company registrations.However, even through these blackest periods the private company form neverdisappeared altogether. From 1872-1874 an increase in private company registrationsagain occurred. This rise in numbers was interrupted briefly in 1875, only to recover in1876 and then maintain a steady rate of growth from that time through to the end ofthe period covered by Richmond and Stockford's sample (1889).47 The sample used byRichmond and Stockford is unusual in that it is constituted by the first 1,000 registeredcompanies which were still active in 1980. The fact that it only includes survivingcompanies, when most companies have, despite the existence of perpetual succession,only a short life span, means that there is possibly something unusual or exceptionalabout the companies in the sample. Even though the sample is not thereforecharacteristic of all companies it does suggest that throughout the 1860s smallenterprises utilised the Limited Liability Act, a finding which is contrary to theprevailing orthodoxy which suggests that such entities were a "perversion" of theintention of the limited liability legislation, and only came into vogue in the 1880s.48

Perhaps even more surprising is that the survival rate of these companies is somewhatgreater than that for larger public companies.49

Another tentative conclusion which might be made on the basis of Richmond andStockford's analysis, and which also runs against prevailing orthodoxy, is that small,private companies tended to have a greater longevity than their larger publiccounterparts. The only other possible explanation for the apparent over-representationof private companies amongst Richmond and Stockford's sample of "survivors" is thatregistrations of such enterprises were taking place at such a rate from early in thehistory of modern company law that, by reason of their sheer numbers, they outweighpublic companies in the sample of "survivors". This, however, is unsustainable as itwas not until the 1890s that the number of private company registrations approachedthe number of registrations of public companies. Thus the over-representation ofprivate companies in Richmond and Stockford's sample is even more significant assuch enterprises would have been significantly under-represented as a category in totalregistrations until late in the nineteenth century.

46474849

The Annual Register (1866) at 187.L Richmond and B Stockford, above n 45 at x-xi.For example, P Ireland, above n 9; and 0 Kahn Freund, above n 1.Table 2. Compare with survival rates for Scottish companies in P Payne, The Early ScottishLimited Liability Companies 1856-1895: An Historical and Analytical Survey (1980) which hasbeen reformulated into tabular form in R Mc Queen, Company Law in Great Britian and theAustralian Colonies 1854-1920: Towards a Social History, PhD thesis, Griffith University (1996)Appendix Two.


In addition to the above summary of Richmond and Stockford's study Table Twoalso illustrates the relative longevity of genuine private company registrations. Itconsists of an analysis of a random sample of 10 per cent of all company registrationsfor the years 1856, 1866, 1876 and 1886. The mean survival period for public companiesin the sample was 8.95 years, for private companies 12.17 years and for conversioncompanies (which in this sample only include enterprises which converted to publiccompanies) the mean survival period was 7.66 years.

TABLETW050

SURVIVAL RATES OF COMPANIES BY TYPE FOR TOTAL SAMPLE OFCOMPANIES FOR THE YEARS 1856, 1866, 1876 and 1886

65 1 16 23 1 0 0

20 1 12 24 1 0 1

19 1 11 25 1 0 0

16 1 10 26 3 0 2

14 3 4 27 2 1 0

15 2 3 28 3 0 1

14 1 3 29 1 0 1

11 2 5 30 1 0 0

10 0 4 31 1 0 0

10 2 1 32 1 0 1

10 2 1 33 2 0 1

5 1 3 34 1 0 0

6 2 1 36 1 1 0

3 0 3 39 1 0 0

7 2 1 40 2 0 0

4 1 0 44 1 0 0

4 0 2 45 2 0 0

5 3 3 46 2 0 1

4 0 2 47 1 1 0

3 1 2 49 2 0 0

2 0 1 53 1 0 0

3 1 1 Unknown 1 0 0

4 0 0

Another study which identifies significant numbers of private company registrationsduring the 1860s and 1870s is Professor Payne's analysis of Scottish company

50 This Table is taken from R Mc Queen, above n 49. Full details of the sample upon which the

51table is based can be found in Appendix One of the thesis.This unknown has not been included in computing means.


registrations.52 Unfortunately it is difficult to compare Payne's figures in this regardwith my own or with those of Richmond and Stockford as he has not disaggregated hisquantitative sample by private and public venture. Nevertheless, he suggests thatrelatively large numbers of private undertakings being registered as limited liabilitycompanies from an early date might explain the low average capitalisation of Scottishcompanies. Payne's figure~ also indicate a greater longevity amongst Scottishcompanies than amongst their English counterparts. If indeed there was a higherproportion of private enterprises amongst the Scottish registrations than was the casein England this would be consistent with Richmond and Stockford's suggestion thatprivate companies tend to have greater longevity than their public counterparts andwith the apparent greater longevity of private companies in my own sample ofregistrations from 1856, 1866, 1876 and 1886.

The conclusion that private companies during the nineteenth century tended to bebetter and more successful corporate citizens than their larger rivals is also borne outby Shannon's study of corporate registrations between 1866 and 1883. He found thatthe proportion of private companies to public companies was "unexpectedly high"from the earliest date in the study and that "on the whole [theJ behaviour [of theseprivate companies] was better than that of the public companies". 3

The extent to which the limited liability legislation was used from its very inceptionby private concerns is apparent from evidence presented to the 1866 Select Committeeappointed to inquire into the legislation. Warning of pte potential for fraud, MrEdmond Boyle Church, Chief Clerk of the Rolls Court, stated to the Committee:

[T]he Committee must be good enough to remember that the principle of LimitedLiability is now being extended to a vast number of small concerns, with which men ofinfluence and position would have very little to do. I have no doubt that the Committeehas the information before it, but there are small companies with capitals as low as £500to carry on the business of brewers, bankers, farmers, agricultural steam-engineproprietors and the like.Q. Have you found more frauds amongst these small companies than amongst the largerones?

A. I think that, as a general rule, there has been more fraud in small than in largecompanies.

Q. Do you think that persons carrying on the business of an unlimited company,sometimes form it into a limited company in order to get rid of their debts andobligations?

A. No such case occurs to me; but I think that there are cases of partnerships where acompany has been formed for the purpose of getting rid of the personal liability of themembers of the Partnership.

Q. Do you think it would be possible for a person to get rid of his debts by transferringhis business to a Limited Liability company?A. Undoubtedly it is possible.54

A number of conclusions are suggested by the distinct possibility that privatecompanies were a significant force in the period preceding the 1880s. The first is that

5253

54

P Payne, above n 49.H A Shannon, "The Limited Companies of 1866-1883" (1932) 4 Economic History Review, 1stseries 290 at 302.Evidence of Mr. Church, Select Committee on Limited Liability Acts (1867) Q.1555-1558.


the conventional view of company legislation as a device to facilitate large scaleenterprise, only later to be perverted by the appropriation of the form by largenumbers of small enterprises, is seriously flawed. If from the very inception of limitedliability legislation that legislation was utilised by small enterprises, then the notionthat the adoption by private enterprises of limited liability corporate form is some sortof "fall from grace" from the otherwise "pure" intentions of the framers of thelegislation cannot hold water. It might be suggested that the nature of the legislation,in its form as it unfolded during the nineteenth century, owes much to these smallenterprises and the experimentation with the corporate form by small entrepreneurs.This group was perhaps far more progressive than their larger competitors in seeingthe real advantages limitation of liability might confer on their enterprises, withoutcompromising the privacy which had previously been secured by the partnershipform.

The deletion of balance sheet requirements from the 1856 Act, and the subsequentinability of various pressure groups to have such provisions reinstated may also bebetter understood once it is recognised that there was relatively widespread use of thelimited liability legislation by small private companies from the inception of thelegislation. This group had a vested interest in resisting the introduction of suchprovisions, for limited liability incorporation would cease to be a desirable option if thetrade-off was to make their balance sheets available to their competitors and thetaxation authorities. Edgar Jones has commented on the reasons for such apparentfinancial ineptitude amongst the English family businesses of the nineteenth century:

[t]his parlous state of business accounting is not surprising. Regular calculations of profitand statements of the value of assets were of little interest to the entrepreneur closely andcontinuously involved in his own business operations. Provided he was not accountablefor part of his profit to others, little thought needed to be given to its precise and periodiccalculation ... It was only with the advent of shareholders or (in lesser degree) the adventof partners outside the family circle and the need to calculate their dividends or share ofthe profits while providing an outward measure of the viability of the operations, thatpublic accountants tended to be called in to examine and report on a company's or firm'saccounts.55

As suggested earlier, fear of competitors finding out details of one's business secrets orthe internal revenue office discovering the true levels of profitability of one'sundertaking constituted the overriding reasons for most small entrepreneurs resistingthe introduction of compulsory balance sheets.

It was also the case that those small entrepreneurs who saw limited liabilityincorporation as a potential route by which to avoid personal responsibility for theirdebts would not want their financial affairs made public. This gI:oup of entrepreneurs,who have been dubbed by Professor Levi as "slippery slopers",56 would naturally beopposed to the introduction of public balance sheets, as the only available financialescape route which they possessed would be shut off if they had to give advance noticeto the public of the impending collapse of their businesses.

55

56

E Jones, Accountancy and the British Economy: The Evolution of Ernst and Whinney 1840-1980(1981) at 54. See also the comments of De Paula cited in J Kitchen and RH Parker,Accounting Thought and Education: Six Pioneers (1984) at 3.M Levi, above n 42 at 1-2.


Successful small entrepreneurs, however, might be just as uneasy about publicexposure of their affairs. The reason for this can be understood in light of ProfessorPayne's discovery that private companies, at least in Scotland during the second andthird quarter of the nineteenth century, could be extremely profitable, returningdividends of over 15 per cent, at a time when 5 per cent was considered a good returnon capital.57

In concluding this section of the paper it should perhaps first be noted thatSalomon's case was the conclusion of the long standing process whereby small businessentrepreneurs "colonised" the corporate form. By the time Salomon's case was finallyresolved in the House of Lords commercial expectations in respect to the permissibilityof small private company registrations were so great that it is difficult to see how thematter may have been resolved otherwise. Even if the Salomon decision had "gone theother way" it is almost certain that the subsequent outcry amongst incorporated smallbusinesses and their supporters would have rapidly led to legislative intervention inorder to restore corporate status, clarify the nature of private companies, and deal withtheir special needs. As it was, the House of Lords effectively let the legislature off thehook in respect of providing specifically for private companies in the Companies Act.The decision almost certainly retarded, rather than accelerated, reasoned legislativeresponse to the burgeoning numbers of small enterprises incorporating under theCompanies Acts. Unlike colonial Victoria, which had responded rapidly to therecommendations of the Davey Committee and legislated for a separate legalcategorisation of such businesses-the proprietary limited company-and providedfor different standards in respect to the preparation of public documents of companies,such as the balance sheet, the English legislature was paralysed after the Salomondecision. Nothing constructive occurred until it was far too late. By 1907, whenlegislation was finally passed recognising the special status of private companies, thenumbers of such companies were so great and the expectations around them soentrenched that a substantial re-think of the structure of English company law, such asthe introduction of special legislation dealing with small enterprises seeking corporatestatus, was no longer possible.

CONCLUSIONS

After the above discussion we can see that the Salomon decision is a marker of sorts.However, it is not the sort of landmark which it normally is taken for. In one sense theSalomon decision is a sad finale for the high liberalism of Victorian England. Loweproclaimed the Companies Act 1856 (UK) as a blow for "human freedom", and wassupremely confident that commercial practice would sort out the kinks in themachinery of this new organisational form. By the time Lowe participated in his lastpublic forum dedicated to discussing the past and future of the Companies Acts, theSelect Committee of 1877, he was beginning to sound like a defeated man. He admittedthat many frauds had been committed by companies, he knew that small businesseswere using the Acts to arrogate corporate status for themselves, he was aware thatmany large British businesses still refused to incorporate on the basis that it woulderode "trust" in their enterprises. Nevertheless, despite these misgivings, Lowe (or

57 P Payne, above n 49 at 105 fn 4.


Viscount Sherbrooke as he then was) persisted in defending the legislation on thegrounds that the market would constitute the ultimate regulator of corporate capital.

By 1877 there were few fellow members of the Select Committee on the CompaniesActs 1862 & 1867 (UK) who unequivocally supported Lowe. Most on the Committeefelt that some change was necessary, many advocated sweeping changes and, probablymost galling of all to Viscount Sherbrooke, a return to the regime enshrined in the JointStock Companies Act 1844 (UK). It was now considered that some form of Stateintervention was necessary to avert the worst abuses of the existing system. Amandatory requirement for a balance sheet to be annually made available in somecommon form was considered to be necessary, as was an augmentation of the powersand responsibilities of the Registrar of Companies.

Salomon v Salomon & Co Ltd is, however, a marker of quite a different sort than isusually considered to be the case. It represents, in one respect, the last hurrah of highliberalism in British company law: one last refusal to intervene on the part of thelegislature in commercial matters. It is also, oddly enough, the undertaker of"modernism" in British company law rather than a component part of its onwardmarch. By recognising the legitimacy of the small business take-over of Britishcompany law the House of Lords spelt an end both to the aspirations for the neworganisational form at its unveiling in 1856 and to the possibility of achieving acoherent vision of the theoretical superstructure of British company law. Life withoutSalomon may now be inconceivable. We can live perhaps on romantic dreams that lifesans Salomon mCl:Y also have been better, but given the nature of vested interestssurrounding the corporate form at the end of the nineteenth century that seemsunlikely.

life without salomon · salomon's case is, infact, so well ingrained inour sensibilities...

Documents