Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22 – a landmark company lawcase.

CASE NAME

Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22 – a landmark company law case. 

It was ruled in the court of the House of Lords by Lord Halsbury L.C. 

The judgement in the case was delivered on November 16, 1897. 

Parties Involved. 

In Salomon v A Salomon & Co Ltd (1897), the parties involved were Mr. Aron Salomon and his company, Salomon & Co Ltd. Mr. Salomon was the principal figure who transferred his sole-trader business to a newly incorporated company, with members of his family holding the remaining shares to meet the requirements of the Companies Act, that is, 7 people were needed to make up a limited liability company. 

The case was brought against Mr. Salomon in the liquidation of the company, with the unsecured creditors of Salomon & Co Ltd acting as the effective plaintiffs. They sought to hold Mr. Salomon was personally liable for the company’s debts. The unsecured creditors in the case are the other 6 people that make up the company. 

The Defendant in this case is Mr. Aaron Saolomon. The case challenged his personal liability for the company’s debts. He was the majority shareholder and managing director. 

Facts of the case. 

Mr. Aron Salomon made leather boots or shoes as a sole proprietor. He registered his company and transferred his leather making business to the company. The newly incorporated company purchased the sole trading leather business. The business was valued by Mr Salomon at ₤39,000 and obtained 20,000 shares a debenture (paper that evidences a secure debt) as consideration. The problem was that at this time the Company Act required you to have 7 shareholders. 

His wife and five elder children became subscribers and the two sons became directors. Mr Salomon took 20,001 of the company’s 20,007 shares which were payments from A Salomon & Co Limited for his old business (each share was valued at £1). The transfer of the industry took place on 1 June 1892. The company also issued to Mr Salomon £10,000 in debentures. 

Soon after Mr. Salomon incorporated his business, boot sales declined. The company failed, defaulting on its interest payments on its debentures. The company was put into liquidation. The company’s assets remained, of which Salomon claimed under the retained debentures he retained. If Salomon’s claim was successful this would leave nothing for the unsecured creditors. When the company failed, the company’s liquidator contended that the floating charge should not be honoured, and Salomon should be made responsible for the company’s debts. The liquidator argues that the company was a sham and sought to have Mr. Salomon personally compensated the company and had his debenture cancelled. 

Issues Raised.

• The legal matters brought to light in the case of Salomon v. Salomon centered on the doctrine of corporate personality and the fundamental principle of limited liability. Mr. Aron Salomon’s principal contention was that his enterprise, Salomon & Co. Ltd., ought to be acknowledged as a distinct legal entity separate from himself, hence constraining his personal liability. The creditors argued that the company merely acted as an agent for Mr. Salomon and should not be treated as an autonomous entity. 
• The legal issues raised in Salomon v. Salomon persist in influencing company law jurisprudence and moulding the comprehension of corporate entities in the contemporary commercial environment. 
• The repercussions of this case resonated throughout company law, challenging the boundaries of corporate personality and the scope of protection granted by limited liability to shareholders. 
• Piercing the corporate veil or lifting the corporate veil is a legal pronouncement by which the rights or duties of a corporation are treated as the rights or liabilities of its shareholders, i.e. subscribers of memorandum or charter. Usually a corporation is treated as a separate legal person, which owes its genesis to Salomon 

Arguments of the party. 

The petitioner argued that the Company was validly formed under the Companies Act 1862.The company was a separate legal person and responsible for its own debts. All legal formalities were observed during incorporation and the transaction was transparent and within the law. The Respondent who was the liquidator argued that The company was a sham, created to shield Salomon from liability. He stated that Salomon was the real controller and therefore personally liable. He also pointed out that the company was merely Salomon’s agent or alter ego. The creditors were misled and that the intent behind incorporation was dishonest. The contrast between statutory compliance and ethical interpretation was at the core of the conflict. Salomon’s counsel leaned on legal form; the liquidator focused on economic substance. 

Judgement and final decision 

According to Wikipedia, The Court of Appeal confirmed Vaughan Williams J’s decision against Mr Salomon, though because Mr Salomon had abused the privileges of incorporating a limited liability company, which Parliament had intended only to confer on “independent not counterfeit shareholders, who had a mind and will of their own and were not mere puppets”. Lindley LJ (an expert on partnership law) held that the company was a trustee for Mr Salomon and, as such, Salomon was bound to indemnify the company’s debts.Lopes LJ and Kay LJ variously described the company as a myth and a fiction and said that the incorporation of the business by Mr Salomon had been a mere scheme to enable him to carry on as before but with his liability for debt limited. 

The House of Lords unanimously overturned this decision, rejecting the arguments of the agency. They held that there was nothing in the act about whether the subscribers (i.e., the shareholders) should be independent of the majority shareholder. The company was duly constituted in law and it was not the function of judges to read into the statute limitations they considered expedient. Lord Halsbury LC stated that the statute “enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others. 

The House of Lords overturned this decision, rejecting the arguments of the agency. They held that there was nothing in the act about whether the subscribers (i.e., the shareholders) should be independent of the majority shareholder. The company was duly constituted in law Lord Halsbury LC stated that the statute “enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others. 

The words of LORD MACNAGHTEN clearly summarises the law propounded in Salomon. The Honorable Lord Comments, “… The company is at law a different person altogether 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 are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. That is, I think, the declared intention of the enactment…” 

In conclusion, the House of Lords in Salomon v. Salomon held that once the business of Salomon was incorporated as a company, it became a separate legal entity, distinct from him. 

The Legal Reasoning/ Ratio Decidendi. 

The ratio decidendi of Salomon v. A. Salomon & Co. Ltd. is that a company, once validly incorporated, is a separate legal entity distinct from its shareholders and members, possessing its own legal rights and liabilities. Consequently, the personal liability of a shareholder is limited to the value of their unpaid shares, and they are not personally liable for the debts of the company, even if they own the majority of the shares. 

The House of Lords held that the company had a personality separate and distinct from Mr. Salomon and his family members, who were the shareholders. As a result of this separate legal personality, the shareholders are protected from the company’s debts and liabilities. Their liability is confined to the amount of the shares they hold. The Court found that the company had been validly formed and registered according to the Companies Act 1862. The fact that Salomon owned the majority of shares and that the other members were family members did not make the company a mere agent or trustee for him. The Court dismissed arguments that the formation of the company was a sham or fraud. The judges emphasized that the true intent and meaning of the Companies Act 1862 allowed for such a structure. 

In conclusion, the case established the principle of the “corporate veil,” where the law treats the company as an independent person. This protects the shareholders from personal responsibility for the company’s debts, solidifying the concept of limited liability for business owners.

REFERENCE(S): 

Salomon v Salomon| case summary- LawTeacher.net 

Salomon v Salomon and Co Ltd [1897] AC 22- SSRN e-Library. 

Salomon v. A Salomon &Co Ltd – Seafarers Right International. 

Salomon v Salomon and Co Ltd [1897] AC 22- lawProf.co 

Salomon v. Salomon by Abhinav Pandey;16th April, 2024 – The Legal Quorum 3 Phillip Lipton, The Mythology of Salomon’s Case and the Law dealing with the Tort Liabilities of Corporate Groups: An Historical Perspective, 

Salomon v Salomon & Co. Ltd. [1897] AC 22 – its impact on 

modern laws on corporations – selected studies from the UK and the USA – Rajib Dahal http://corporations.ca/assets/Salomon%20v%20Salomon.pdf at p.27 of 38 [1897] AC 22, 39–54