Authored By: Abdulhameed Sumayyah Adenike
Fountain University, Osogbo, Osun State, Nigeria.
Case Title & Citation
Salomon v. Salomon & Co. Ltd. [1897] AC 22 (HL).
Court Name & Bench
The case was decided by the House of Lords, then the apex court in the United Kingdom. The bench comprised Lord Halsbury LC, Lord Watson, Lord Herschell, Lord Macnaghten, Lord Morris, and Lord Davey. It was a full appellate bench tasked with determining a fundamental question of company law: the status of the corporation vis-à-vis its members.
Date of Judgment
The judgment was handed down in 1897.
Parties Involved
Appellant: Mr. Aron Salomon, a Jewish immigrant and prosperous leather boot manufacturer, who had been conducting business as a sole proprietor before incorporation.
Respondent: Salomon & Co. Ltd., the company incorporated under the Companies Act 1862 by Salomon himself, along with his family. The liquidator, acting on behalf of the unsecured creditors, was the effective respondent.
Facts of the Case
Mr. Salomon had operated a boot manufacturing business in Whitechapel for many years. In 1892, seeking to take advantage of the protections afforded by incorporation under the Companies Act 1862, he formed Salomon & Co. Ltd.. The Act required a minimum of seven shareholders. To meet this requirement, Salomon allocated one share each to his wife and five children, while retaining the overwhelming majority himself, 20,001 shares out of 20,007.1
Salomon then sold his sole proprietorship business to the new company for £39,000. The consideration was partly satisfied in cash, partly in shares (the 20,001 shares issued to him), and partly through secured debentures worth £10,000 carrying a floating charge over the company’s assets.2
Soon afterwards, an economic downturn struck, and the company experienced financial distress. Within a year, it became insolvent. At the time of winding up, the assets were insufficient to meet the claims of both secured and unsecured creditors. Beca use Salomon held debentures secured by a floating charge, he stood to recover before unsecured creditors. This left the unsecured creditors with virtually nothing.3
The liquidator argued that the company was not genuinely independent of Salomon; rather, it was his mere “agent” or “alias,” and therefore Salomon should be held personally liable for the company’s debts. Both the High Court (Vaughan Williams J) and the Court of Appeal (Lindley LJ, Lopes LJ, Kay LJ) accepted this contention, branding the incorporation a fraud upon creditors.4
Salomon appealed to the House of Lords.
Issues Raised
The case revolved around several interrelated legal issues:
Whether a company, incorporated with seven members under the Companies Act 1862 but dominated by one person, could be recognised as a valid separate legal entity. Whether the company was in truth an “agent” or “trustee” of Salomon, making him personally liable for its obligations.
Whether incorporation in such circumstances amounted to a fraud upon creditors. Whether limited liability should shield Salomon, given his overwhelming control and benefit from the arrangement.
Arguments of the Parties
Respondent’s Arguments (Liquidator / Creditors)
- The Company Was a Sham or Façade:
Counsel argued that Salomon had not truly created an independent company but merely clothed his sole proprietorship in corporate form. The six family members were “dummy shareholders” with no genuine interest in the business.5The reality was that Salomon remained the sole trader, and the Act was not intended to protect such abuse. 2.
2.Agency and Trust Theory:
The liquidator contended that the company was effectively an agent of Salomon, holding assets on his behalf. Since Salomon exercised total control, the company’s dealings should be attributed to him personally.6 Under agency principles, a principal is liable for the acts of his agent; thus, Salomon ought to indemnify creditors.
- Fraud on Creditors:
The structure allowed Salomon to prefer himself over unsecured creditors by holding secured debentures. This was characterised as a scheme to defraud those creditors who had dealt with the company in good faith, unaware that its financial structure disproportionately benefitted Salomon.7
- Purposive Reading of the Act:
The creditors argued that the legislature never intended the Companies Act 1862 to legitimise such one-man companies. Its purpose was to facilitate joint stock enterprises where multiple independent shareholders pooled capital. To use it otherwise was to defeat Parliament’s intent.8
- Moral Grounds:
The Court of Appeal emphasised that Salomon’s conduct was “contrary to true intent and meaning” of company law and “a mere scheme to enable him to carry on business in the name of the company with limited liability.”9
Appellant’s Arguments (Mr. Salomon)
- Company as Separate Legal Person:
Salomon’s counsel argued that once duly incorporated, a company is a distinct legal entity separate from its shareholders. It owns property, incurs debts, and has legal rights and obligations of its own. The degree of shareholding concentration was irrelevant.10
2. Strict Compliance with the Act:
The requirements of the Companies Act 1862 were satisfied: there were seven members, each holding at least one share, and proper registration. Nowhere did the Act require that shareholders be independent or hold significant stakes. Courts could not impose additional conditions not written into the statute.11
- Legitimacy of Majority Control:
Many companies are controlled by a single or majority shareholder. This does not affect the validity of incorporation. The principle of majority control is central to company law; it cannot be undermined simply because the minority are family members.12
4. Lawful Secured Credit:
Salomon’s secured position as a debenture holder was legally sound. The floating charge gave him priority over unsecured creditors, and this was a risk creditors knowingly undertook in dealing with a limited liability company.13
- Policy Argument – Commercial Certainty:
To disregard incorporation whenever one person dominated the company would undermine the certainty of commercial law. Investors would hesitate to form companies, fearing courts might later declare them invalid.14
Judgment / Final Decision
The House of Lords unanimously allowed the appeal.
The Lords held that the company was validly incorporated and thus a separate legal entity.
Salomon was not personally liable for the company’s debts.
His secured debentures were valid and enforceable, giving him priority over unsecured creditors.
The motives for incorporation or the degree of shareholder independence were irrelevant; the statute was satisfied.
Lord Halsbury LC declared:
“Once the company is legally incorporated, it must be treated like any other independent person with rights and liabilities of its own.”15
Thus, the House of Lords overturned the rulings of the lower courts.
Legal Reasoning / Ratio Decidendi
(a) Separate Legal Personality
The Lords emphasised that upon incorporation, a company becomes a distinct legal person. Lord Macnaghten observed that “the company is at law a different person altogether from the subscribers… and the business is the company’s business, not the subscribers’.”16
(b) Compliance with the Statute
The statute required seven members, nothing more. Since Salomon complied, it was not open to courts to imply further requirements. To do so would amount to judicial legislation.17
(c) Limited Liability as Policy
The Lords reinforced that limited liability is the cornerstone of corporate law. Creditors voluntarily contract with limited liability companies and cannot later complain of its consequences.18
(d) Agency Rejected
The agency argument was firmly dismissed. A company cannot be regarded as an agent of its shareholders absent an express agreement. The mere fact that one person dominates does not establish agency.19
(e) Creditor Protection
The Lords acknowledged that creditors could be left at a disadvantage, but noted that this was a matter for Parliament, not the courts.20
Conclusion / Observations
The Salomon case is a constitutional moment in company law. Its impact can be assessed under several heads:
- Foundation of Corporate Personality:
The case firmly established the principle that a company is a separate person. This enabled corporations to become central vehicles of commerce worldwide.21
- Limited Liability Secured:
Investors could now confidently participate in business ventures without risking personal ruin, which encouraged entrepreneurship and economic growth.
- Corporate Veil Doctrine:
While Salomon confirmed that the corporate veil cannot lightly be pierced, later cases introduced exceptions:
Gilford Motor Co Ltd v. Horne [1933] Ch 935 (evasion of obligations). o Jones v. Lipman [1962] 1 WLR 832 (sham transactions).
Prest v. Petrodel Resources Ltd [2013] UKSC 34 (UKSC clarified veil piercing).22
4. Policy and Criticism:
Critics argue that Salomon prioritised formalism over fairness, enabling controlling shareholders to disadvantage creditors.23 This prompted legislative reforms (e.g., fraudulent trading provisions under Insolvency Act 1986, s 213).
- Global Legacy :
The doctrine has been adopted across common law jurisdictions, India, Nigeria, Canada, Australia, and beyond.24
In sum, Salomon v. Salomon remains the cornerstone of company law. It illustrates the enduring tension between corporate autonomy and creditor protection, a debate that continues in modern jurisprudence.
Reference(S):
1 Companies Act 1862, 25 & 26 Vict c 89.
2 Salomon v. Salomon & Co. Ltd. [1897] AC 22 (HL).
3 ibid.
4 Brodie v. Howard (1894) 2 Ch 402 (CA).
5 Salomon (n 2).
6 Ibid.
7 ibid.
8 L Sealy and S Worthington, Cases and Materials in Company Law (11th edn, OUP 2016) 54.
9 Salomon (n 2).
10 ibid.
11 Paul L Davies, Gower and Davies’ Principles of Modern Company Law (10th edn, Sweet & Maxwell 2016) 36.
12 ibid.
13 A Hicks and S Goo, Cases and Materials on Company Law (8th edn, OUP 2011) 67.
14 Brenda Hannigan, Company Law (6th edn, OUP 2021) 42–43.
15 Salomon (n 2) 30 (Lord Halsbury LC).
16 ibid (Lord Macnaghten).
17 ibid.
18 Davies (n 11) 40.
19 Salomon (n 2).
20 ibid.
21 Lee v. Lee’s Air Farming Ltd [1961] AC 12 (PC).
22 Prest v. Petrodel Resources Ltd [2013] UKSC 34.
23 Hannigan (n 14) 50.
24 Andrew Keay, Company Law in Context (2nd edn, OUP 2012) 73.
