Companies and creditor.docx1

COMPANIES AND CREDITOR-RIGHTS: SALOMON V. SALOMON-THE
GHANAIAN EXPERIENCE [1973] VOL. V NO. 3 RGL 187—196
FIADJOE ALBERT
EVERY student of company law knows of Salomon v. Salomon & Co. as a leading case in the
common law of corporations. Indeed, the courts over the years have remained basically faithful
to its doctrine; which is that upon incorporation a company becomes a separate legal entity,
distinct from its members and capable of bearing rights and duties. Murray Pickering has
argued forcefully that “the evolution of the company as a separate legal entity is one of the
law’s greatest contributions to business and commerce.” According to him, the concept of
the company as a separate legal entity “provides the community with an exceptionally valuable
form of association and ownership. It offers a medium in which expertise in management and
the use of assets can be combined with individual ownership and control. For the investor, the
ordinary share, which results from the reconstruction or reformulation of property rights in
the company, is clearly one of the most convenient and flexible forms of property ever devised.
The existing and potential benefits to individual investors, company management and the
community as a whole through the use of this means of facilitating business and commercial
transactions can hardly be over-estimated.”
This, however, is only one side of the story. The other side of the argument which has not been
too well appreciated concerns the abuses made of the concept of corporate entity. Professor
Kahn-Freund does not mince his words in referring to Salomon v. Salomon & Co. as a
“calamitous decision.” The argument here is that the courts have often used—or more
accurately, abused—Salomon v. Salomon & Co. to deny protection to the company’s creditors.
This is what Professor Kahn-Freund decries as“the complete failure of the courts to mitigate the
rigidities of the ‘folklore’ of corporate entity in favour of the legitimate interests of the
company's creditors. As it is the company has often become a means of evading liabilities and of
concealing the real interests behind the business." The message of the present article then is to
appeal to our courts to try and right this imbalance in their application of the Salomon doctrine.
The reasons for this view are twofold. The first is that the shareholder is in fact fairly well
protected by the law already. The second reason is that unless due regard is had to the protection
of creditor rights, we may well be in danger of stifling a rich source of capital formation which is
so vital to the operation of any meaningful commercial activity.
It is a pity that thus far our courts have shown a near total bias in favour of the shareholder
against the creditor. We shall try and justify this indictment by examining a few local cases and
then attempt to offer some guidelines as to how the courts can come to the aid of the creditor
without necessarily conceptually breaching the doctrine of Salomon v. Salomon & Co.
THE PROBLEMS IDENTIFIED

Creditor rights assume great importance when the company is not solvent. In two main areas the
concept of incorporation has been used as a shield to protect corporate wrongdoing. The first
centres round the problem of obtaining credit in the company's name. Invariably, the
"brain" behind the company—very often the majority shareholder—borrows money in the
company's name. That loan is at times misapplied and even diverted to unauthorized personal
uses. When the time for repayment arrives, the company defaults. The lawyer who brings a
successful suit against the company then learns that the company is not solvent, though the
"brain" behind the company is. What ought the law to do about this? So far the usual argument
has been to say that the company is a separate legal entity, different and apart from its members.
If the company is not solvent then it is just too bad for the creditors. Some lawyers would
normally sue the company as well as its managing director jointly and severally but they also
meet with the same argument founded on Salomon v. Salomon & Co. Others sue only the
company but later on seek to levy execution against the managing director. They also meet with
the same argument.
The other area of corporate wrongdoing in which Salomon v. Salomon & Co. has featured
in Ghana relates to a change in the type of business association. The method which has been
used by management to evade the repayment of just debts owed by their companies is to change
from one type of business association to another and then to dispose of the assets of the old
company to the new one. Examples from decided cases are discussed hereunder.
A LOOK AT THE CASES
The first to be examined is the decision of Djabanor J. (as he then was) in the case of Majdoub
& Co., Ltd. v. Bartholomew & Co., Ltd. where Bartholomew took action against a firm by
name Fattal & Majdoub & Co. for £G1,350 being amounts owed to them. While the action was
pending, the firm was dissolved and a limited liability company, Majdoub & Co. Ltd. was
formed to take over the business, assets and liabilities of the firm. Mr. Majdoub, who was a
partner in the firm, became the managing director of the company. Bartholomew & Co. Ltd.
obtained judgment against the firm and in execution of that judgment attached a store formerly
belonging to the firm but now owned by the plaintiffs. The plaintiff thus instituted action for
damages for unlawful attachment. Djabanor J. found for the plaintiffs. In his view, the concept
of incorporation was a complete answer to the defendant's action and it was no defence for
Bartholomew to argue that "Majdoub & Co. Ltd. was Fattal & Majdoub in disguise." His
lordship did not once consider that the limited company had been formed to take over the assets
as well as the liabilities of the partnership firm.
His lordship relied instead on the usual learning in Salomon v. Salomon & Co. In his own words:
"A limited liability company is an artificially created body by statute and I think the law is
entitled to recognise that artificial existence . . . For my part as soon as I accept the evidence that
Majdoub & Company Ltd. bought the assets of the old Fattal & Majdoub, which I do, I must

necessarily hold that the defendants cannot attach their property in execution of a judgment-debt
of Fattal & Majdoub because the two firms are quite separate, different and distinct legal
persons."
The law stated therein may be correct but its application to the facts is palpably wrong and
clearly contrary to the express undertaking made by the limited company in its regulations to
meet the liabilities of the old firm. Besides, his lordship's view is so grossly inequitable to the
creditors that this holding ought to be viewed with reserve. Nowhere in the judgment does his
lordship consider for one moment the fact that this is a patent fraud on the creditors. The
aggravating nature of this fraud, bordering on contempt of court, is shown by the fact that the
firm sold its assets while action was pending in court against it. It must have been a triple agony
for the creditors in this case to have lost the suit, to have lost their money, and on top of it all, to
have been mulcted in damages for the wrongful attachment of property. In fact the damages
awarded against Bartholomew were assessed at £G1,350, the very sum that the plaintiffs owed to
Bartholomew. In so far as Djabanor J.'s decision does not consider the fact that what was done
amounted to a fraud on the creditors and did not have any regard to the express undertaking of
the limited company to pay up the firm's liabilities, it is submitted with respect that his decision
is wholly insupportable.
What this case highlights is the neglect of the court to protect the company's creditors. The
judgment as it stands offers an opportunity for fraudulent dealing against creditors and must
consequently be attacked radically on that ground.
On broadly similar facts Grant v. Tikobo (Ghana) Ltd. offers no consolation to creditors either
though the case was fought on a slightly different footing. There too, Tikobo Ltd., who were
indebted to the plaintiffs in the sum of £G15,000 had secretly and without the knowledge of the
plaintiffs sold their business to another company. Instead of arguing that the sale of the business
was deliberately aimed at defeating their claim, the plaintiffs argued, perhaps wrongly, that the
sole managing director of Tikobo should be prevented from leaving the jurisdiction unless he
paid into court the sum demanded by the plaintiffs as security for the claim. On these arguments
it was easy for Archer J. (as he then was) to adopt a strictly legalistic approach to defeat the
plaintiff's argument. Once again, he based himself squarely on Salomon v. Salomon & Co. May
it not be that Salomon v. Salomon & Co. is (to borrow Professor Kahn-Freund's phrase) proving
to be a calamitous decision in the Ghanaian context? According to Archer J. the action was
against the company, Tikobo Ltd., which had divested itself of all its assets. That company was a
separate person from its managing director and also from the new company to whom it had sold
its assets. His lordship said:
"I note that in the field of politics and diplomacy between states a very effective modern
instrument of persuading other countries to behave is to detain and hold their nationals as
hostages until expectations are fulfilled. But I am not dealing with international law between
states. I am dealing with company law in Ghana and I find it difficult to prevent Mr. Bayford

from leaving the country either by detaining him in custody or by permitting him to leave on
condition that the defendants provide security for his return to Ghana when in fact as a director
he cannot be held liable for the defendant company's liability in contract."
It is probable that the judgment went the way it did because the plaintiffs argued their case on the
basis that the managing director should not be permitted to leave the jurisdiction. As his lordship
observed "if the plaintiffs obtain judgment against the defendants, there are various ways of
enforcing that judgment against the defendants in Ghana without the presence of Mr. Bayford in
Ghana."
But once again it is no consolation to the company's creditors to have to be told, albeit indirectly,
that it is perfectly proper for the company to dispose of all its assets without making any efforts
to pay up its debts. One may well argue that it is for the creditors to ensure that they have some
security for their loans. That is undoubtedly the surest way of protecting the creditor, but one
would have to consider the hard realities in Ghana. The rich Ghanaian individual who is
approached for a loan by say, a local timber company would invariably agree out of complete
trust arising from previous association—on which after all business is founded—and would be
very slow to insist on any security. Moreover, such a person may not be aware of the fact that he
ought to insist on a security nor of the fact that the company is a separate legal person from the
officer who comes to negotiate for the loan. It is admitted that ignorance is a misfortune and not
a privilege; but the law that takes no account of the ignorance of the community in allowing such
an obvious device to cheat creditors is obviously out of step with the ethos of the community. In
such a situation, the courts ought to try to redress the imbalance whenever they can and where
the justice of the case so demands.
With these two cases may be compared the decision of Apaloo J.A. in Handelmij N. V. v.
Jebeille Brothers where the court tried to do just that. There, Handelmij, the judgment creditor,
sought to attach certain properties belonging to a firm by name Jebeille Brothers. Jebeille
Brothers had imported goods through the plaintiffs to the tune of £G4,835 for which they could
not now pay and judgment was given against them for that amount. An appeal by Jebeille
Brothers to the Court of Appeal resulted in the grant of a stay of execution. During the breathing
space offered by this stay of execution, Jebeille Brothers transferred their assets in a
confectionary and shoe firm to a limited liability company. Since it was admitted that Jebeille
Brothers had no independent assets of their own, it meant that by vesting their assets in the new
limited company, they had effectively prevented the plaintiffs from attaching their property.
For Jebeille Brothers it was argued that it was perfectly proper to attach the interest of the
shareholder or director of the limited company who happened to be a member of the debtor firm,
but that a writ of fi. fa. On the assets of the company was an inappropriate and wrongful method
of achieving that result. How could such a thing be done when shareholders are not part-owners
of the company's property? Counsel for the judgment creditors put his argument succinctly. In
his submission, the object of this new entity was to defraud the creditors. Accordingly any

transfer of assets which may have been made to the new company was void as against the
execution creditors. Apaloo J.A. found great merit in that argument, holding that the whole
transaction was a transparent fraud. In his own words:
"It is to me very significant that the ice cream firm should have been dissolved in September
1965, when there was subsisting an unsatisfied judgment debt against the firm and the rubber
shoe firm should be turned into a limited liability company after the appeal against the Jebeille
Brothers was lost and the judgment-creditors had commenced execution proceedings. The
answer to these questions and the one that common sense compels me to give is that the whole
object was to put the properties of the two entities beyond the reach of the execution creditors. I
cannot think of a more transparent attempt to defraud the judgment creditors. "
There is also the case of Chellaram & Sons (Ghana) Ltd. v. Halabi, decided by the old
Supreme Court. In that case, the facts were slightly involved but they followed the same pattern
as the previous cases. Chellaram sued and obtained judgment for £G700 against the Northern
Territories Traders Ltd. In execution of that judgment they attached the goods of the Northern
Territories Traders Ltd. in a store in Kumasi; whereupon Mrs. Halabi, whose husband happened
to be the managing director of the Traders Ltd. sued Chellaram for the wrongful attachment of
properties belonging to her. Her claim was based on a purported sale to her of the business of the
Traders Ltd. together with the goodwill. She therefore sought an order claiming that the
properties belonged to her and that the attachment thereof was wrongful.
Counsel for Chellaram argued three main points; firstly, that the execution of the deed amounted
to a conveyance in fraud of creditors; secondly, that there was collusion between the plaintiff and
the Traders Ltd.; thirdly, that the transaction between Mrs. Halabi and the Traders Ltd. was a
nullity since there was no quorum at the meeting of the company that decided to sell the
property. Counsel for Mrs. Halabi took the point that even if there was no quorum, her husband
Mr. Halabi had ostensible power to sell the company's property and that the plaintiff could not be
presumed to know the rules of the indoor management of the company.
Delivering the judgment of the Supreme Court in which van Lare and Blay JJ.S.C concurred,
Azu Crabbe J.S.C. . . . (as he then was) concentrated on this last submission to overrule Mrs
Halabi's claim. In his view: "the transaction between the plaintiff and the Northern Territories
Traders Ltd. reeks so strongly of fraud that I do not think the rule in Turquand's Case ((1856) 6
El. & Bl. 327) can avail her. . .In this case the plaintiff occupied such a position of responsibility
in the debtor-company at the time of the civil action that she cannot pretend to be unaware either
of the impossibility of securing a quorum at the alleged meeting, . . . or that no resolution was
passed at such a meeting." His lordship concluded therefore that "the conveyance was not
intended to operate as a real transfer of the store and the goods therein and the whole exercise
was a cloak to defraud the creditor in the pending action."

It is a pity that the fraudulent aspect of the transaction was not more emphasized in the judgment.
As it is, one gets the impression that the lack of quorum was the real quarrel with the transaction
rather than the fraudulent aspect of it, but the truth is that it was both. Nevertheless, the judgment
comes to the right conclusion and one that is in line with the obvious need to protect innocent
creditors from the fraudulent intentions of incompetent management.
The conclusions to be drawn from these cases are obvious. First, this type of fraud seems to be
popular in Ghana. Secondly, the courts have not positively taken any one consistent line.
Thirdly, there is a clear need to protect creditors who provide loans to companies otherwise this
source of capital will soon be dried up.
POSSIBLE SOLUTIONS
(1) Lifting the Veil of Incorporation
Company law itself recognises the dangers inherent in applying the Salomon doctrine to its
logical conclusion and, at times, the courts have without hesitation disregarded its principle in
order to arrive at a just and fair conclusion on the facts. The grounds for ignoring the veil of
incorporation are neither clear-cut nor generally accepted. But this has never dissuaded the courts
from generally overlooking the Salomon doctrine in order to prevent corporate fraud and
impropriety. Statutorily too, the courts have lifted the veil in numerous cases especially in favour
of the exchequer. It is the writer's view that a more generous use of this device may well help to
avoid undue hardship to the company's creditors.
(2) The Alter Ego Doctrine
The English courts have used this comparatively recent doctrine to treat the acts of certain
company officials as those of the company itself. It is the writer's view that this doctrine can also
be used to prevent the type of corporate impropriety that we are here concerned with. In
Lennard's Carrying Co. v. Asiatic Petroleum Co. Lord Haldane explained the basis of the
rule as follows:"the fault or privity is the fault or privity of somebody who is not merely a
servant or agent for whom the company is liable upon the footing respondent superior, but
somebody for whom the company is liable because his action is the very action of the company
itself." and in The Lady Gwendolen, Willmer and Winn L.JJ. were prepared to stretch the
doctrine to cover the faults of a person who is not necessarily a director. According to Winn
L.J., "wherever the fault either occurs in a function or sphere of action which the owner has
retained for himself or is that of a manager independent of the owner to whom the owner has
surrendered all relevant powers of control, it is ‘actual fault of' the owner. It is respectfully
submitted that the concept is capable of being used to hold responsible officers of the company
liable for misdeeds, that they may commit, Salomon v. Salomon notwithstanding.
(3) The Bodies Corporate (Official Liquidations) Act, 1963 (Act 180)

Yet another avenue which is open to the courts to deal with the mischief of corporate impropriety
is to rely on the provisions of the Bodies Corporate (Official Liquidations) Act, 1963. Section, 26
(1) of the Act provides:"(1) If in the course of the official winding up of a company it appears
that any business of the company has been carried on with intent to defraud the creditors of the
company or creditors of any other person or for any fraudulent purpose, the Court may, on the
application of the liquidator or of any creditor, member or contributory of the company, if it
thinks fit so to do, declare that the persons who were knowingly parties to the carrying on of the
business in the manner aforesaid shall be personally responsible, without any limitation of
liability, for all or any of the debts or other liabilities of the company as the Court may direct."
It must be stressed though that this is a limited tool for the section only applies to the situation
where winding-up is in progress. But the main brunt of the section is that it denies protection to
the defaulting member who automatically loses all the privileges of limited liability.
Understandably the definition of "intent to defraud" is wide enough to catch a host of situations.
The only regrettable factor is that the invocation of such a beneficial provision has been
restricted to situations of winding up. It is the writer's view that the provision ought to apply
generally. Persons ought not to take advantage of the benefits of limited liability if they are not
willing to deal honestly with the public.
CONCLUSION
This article has been written out of a belief that unless we take a a serious look at the effects of
Salomon v. Salomon & Co. on creditor-rights we may well be in danger of causing serious
damage to the foundations of our company structure. It may dawn on us rather too late that
what—according to Pickering—should be the cornerstone of our company law may turn out to
be the seismic shock that rocked its foundations. The present stress that the courts place on the
right of shareholders and the protection accorded these rights by the Salomon doctrine may well
introduce into our law what Professor Kahn-Freund calls “an element of caprice incompatible
with the certainty which is the life-blood of commercial law.” We in Ghana cannot afford to let
the business world take the view that Salomon v. Salomon & Co, is indeed a "calamitous
decision." It is the duty of the courts to sustain the confidence of the public in our company law.
FOOTNOTES
2 Lee v. Lee’s Air Farming [1961] A.C. 12, P.C.; Grant v. Tikobo (Ghana) Ltd. High
Jones v. Lipman [1962] 1 W.L.R. 832; The Abbey, Malvern Wells Ltd. v. Ministry of Local
Government and Planning [1951] Ch. 728 (see Gower’s comments on this case in Modern
16 Kahn-Freund (1944) 7 M.L.R. at p. 55. Firestone Tyre Co. v. Llewelyn [1957] 1 W.L.R. 464,
H.L.

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