The Gazette 1984

GAZETTE

APRIL. 1984

Judicial Application of

Salomon's Case in Ireland

Gerard McCormack, B.C.L., LL.M.

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.

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.

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,

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.

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."

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"

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.

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."