The Gazette 1984

GAZETTE

APRIL. 1984

Judicial Application of Salomon's Case in Ireland by Gerard McCormack, B.C.L., LL.M.

I T is a fundamental principle of company law that a company is a distinct entity, separate from its share- holders. The relationship of principal and agent does not exist between the company and its shareholders; it cannot be said, therefore, that a company carries on business on behalf of its shareholders. This principle is regarded as having been firmly established by Salomon -v- Salomon & Co. 1 . The statements of principle in this landmark decision were applied by Barrington J. in an analogous instance in Irish Permanent Building Society -v- Registrar of Building Societies and Irish Life Building Society. 2 In the Irish Permanent case the issue revolved around whether the Irish Life Building Society having such close connections with a major financial institution, the Irish Life Assurance Co., was capable of registration under the Building Societies Act, 1976. The plaintiffs submitted that the society was not capable of registration because it was not an autonomous co-operative society but the subsi- diary of another body, the Irish Life Assurance Co. The argument was advanced that such an association would open the door for abuses and some potential abuses which might result from the Assurance Co.'s control of the society were opened to the Judge. Barrington J. proved unresponsive to these submissions. Reference was made to the course of events in Salomon's case, 1 when that case had been heard before the Court of Appeal. In the Court of Appeal Lopes L. J. was emphatic. He said the Companies Act contemplated the incorporation of independent bona fide members, who had a mind and will of their own, and were not the mere puppets of an individual who, adopting the machinery of the Act, carried on his business in the same way as before, when he was a sole trader. To legalise such a transaction would be a scandal. 4 These sentiments were totally rejected in the House of Lords. Their Lordships expressed the view that there was no warrant for saying what was done was contrary to the true intent and meaning of the Companies Act. Lord Macnaghten put the matter pithily: "The company is at law a different person 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 receive the profits, the company is not in law the agent of the subscribers or a trustee for them." 5 Thus the plaintiff in the Irish Permanent case was faced with the formidable hurdle of Salomon -v- Salomon & Co. an attempt was made to surmount the problem by drawing attention to differences in wording between the Building Societies Act and the Companies Act. Section 5 of the Companies Act, 1963 provides that any seven or

more persons or, in the case of a private company, any two or more persons "associated for any lawful purpose" may by "subscribing their names" to a memorandum of association form an incorporated company. S.8 of the 1976 Building Societies Act, on the other hand, provides that any ten or more persons not disqualified by law may form a building society by "agreeing on rules". It was contended that an "agreement" of ten persons contem- plated ten individual wills converging on a particular course. There could be no agreement if all of the ten persons were nominees of the same person. Barrington J. did not favour this subtle exercise in semantics. The submissions on this score were, in his view, based on too fine and metaphysical a distinction to be useful in dealing with practical affairs. The "Boomerang effect" 7 The doctrine of separate corporate entity has, there- fore, received forthright judicial recognition in this jurisdiction. Sometimes, however, the principle acts as a two-edged sword and works to the disadvantage of an incorporator. One such case was Battle -v- Irish Art Promotion Centre Ltd} Here an applicant, who was the managing director and major shareholder of the defendant company, applied ex parte for liberty to conduct the defence of the company on its behalf at the hearing of the plaintiffs action. The application was refused by the High Court and Supreme Court succes- sively. In seeking an appropriate order the applicant was actuated by practical considerations of cost. The company had insufficient assets to permit of solicitor and counsel being engaged to present its defence and if the plaintiffs action should succeed the applicant would be damaged in his business reputation. The Supreme Court expressed a certain sympathy but were generally unmoved by this ad misercordiam plea. O'Dalaigh, C.J. surveyed the case-law on this particular point which tended towards the conclusion that, in the absence of statutory exception, a limited company cannot be represented in court proceedings by its managing director or other servant or agent. 9 He went on:

"This is an infirmity of the company which derives from its own very nature. The creation of the company is the act of its subscribers; the subscri- bers, in discarding their own personae for the persona of the company doubtless did so for the advantages which incorporation offers to traders. In seeking incorporation they thereby lose the right of audience which they would have as individuals; but the choice has been their own." 10 97