Salomon v Salomon & Co Ltd [1897]

Case Title & Citation

Salomon v Salomon & Co Ltd [1897] AC 22, [1896] UKHL 1[1]

Court Name & Bench

House of Lords (United Kingdom)
Judges: Lord Halsbury LC, Lord Watson, Lord Herschell, Lord Macnaghten, Lord Morris, Lord Davey

Date of Judgment

16 November 1896

Parties Involved

Appellant: Aron Salomon – A boot and shoe manufacturer who incorporated his business to benefit from limited liability and became the majority shareholder and secured creditor of Salomon & Co Ltd.

Respondent: The Liquidator of Salomon & Co Ltd – Appointed to wind up the company and distribute assets to unsecured creditors (challenging the secured creditor Broderip’s priority).

Facts of the Case

Mr Salomon’s successful boot and shoe manufacturing enterprise had been under his sole ownership and management for over three decades before incorporation. Seeking to protect personal assets and facilitate capital raising, Mr. Salomon resolved to incorporate his business as a limited company under the Companies Act 1862.[2] Sections 6 and 8 empowered individuals to form companies and defined the contents of the memorandum and articles. Section 18 mandated a minimum of seven subscribers, each taking at least one share; section 30 required registration of any trust interests, and section 43 imposed registration safeguards on debenture issuances.

On 20 July 1892, Salomon entered a preliminary agreement with Adolph Anholt, who served as trustee for the potential company. The contract outlined the purchase and financing terms to ensure strict compliance with statutory formalities.

To satisfy the seven-shareholder requirement, Mr. Salomon held 20,001 shares, while his wife, daughter, and four sons subscribed to one share each. This allocation met the statutory subscriber threshold without raising immediate concerns under section 8, which did not regulate equitable interest or ultimate control. The company was formed with Mr. Salomon owning virtually all shares and his family members serving as nominal shareholders.

The company purchased Mr. Salomon’s existing business for £39,000, allegedly at a price inflated above its actual value. The purchase consideration was satisfied by:

• Mr Salomon was issued £10,000 in debentures under s.43, secured by a floating charge over the company’s assets.
• £20,000 in fully paid shares (entirely owned by Mr. Salomon).
• £9,000 in cash to Mr. Salomon.
• Had any trust interests existed, they would have required disclosure under section 30; none were recorded.

After incorporation, the original debentures were returned and cancelled, then re-issued to Broderip’s bank, with Salomon retaining a beneficial interest. This explains Broderip’s priority in liquidation.

Within a year, the company experienced financial difficulties due to a series of strikes in the boot trade and general economic downturn. The company neglected to pay interest payments on debentures, leading Mr. Broderip to pursue enforcement of his security. The company was placed into liquidation. Upon liquidation, the company’s assets realised approximately £6,000, insufficient to satisfy unsecured creditors.[3]

Court of Appeal Decision:

The liquidator sued to set aside the sale and declare Salomon personally liable. The Chancery Division initially dismissed such claims, but on appeal in Broderip v Salomon,[4] the Court of Appeal split into three camps:

• Vaughan Williams J treated the company as Salomon’s agent, imposing principal liability and indemnifying the agent company for its debts.[5]
• Lindley LJ viewed the company as Salomon’s trustee, improperly created to do what the statute forbade, justifying imposing fiduciary liability on Salomon. ^[6]
• Lopes LJ (with Kay LJ) described the company as a nominee device, a sham pretended association, whereby nominee shareholders masked Salomon’s entire interest, thereby permitting Salomon to cloak his personal liabilities.[7]

As secured creditors, both Mr. Broderip and Mr. Salomon had priority over unsecured trade creditors. However, the liquidator argued that Mr. Salomon should be personally liable for all the company’s debts, claiming the company was a “mere sham”[8] or agent/trustee for Mr. Salomon.

This tripartite approach underscored the liquidator’s equitable appeal: to pierce the corporate veil whenever formal compliance produced apparent injustice. The majority thus held Salomon personally liable for company debts, reversing the lower court.

Issues Raised before the House of Lords:

The primary legal issues were:

• Whether a company duly incorporated in compliance with the Companies Act 1862 constitutes a separate legal entity distinct from its shareholders.
• Whether the predominant control and beneficial ownership by one person invalidates the separate legal personality of a company.
• Should Mr. Salomon incur personal liability for the entirety of the company’s debts?
• Should the Court of Appeal’s characterisation in Broderip v Salomon framing the company as an agent, trustee, or nominee be upheld?
• Whether the debentures held by Mr. Salomon were valid and enforceable.
• Whether equitable rescission claims grounded in Erlanger v New Sombrero Phosphate Co[9] could set aside the preliminary or final sale agreements.

Arguments of the Parties

Respondent’s (Liquidator’s) Arguments:

• The company was a mere sham or fiction created to limit Mr. Salomon’s liability.
• The six family members were mere nominees without real interest in the company.
• The company operated as Mr. Salomon’s agent, rendering him the principal accountable for the company’s obligations and debts.
• The sale of the business to the company at an inflated price constituted fraud on creditors, breaching equitable standards and warranting rescission under undue influence doctrines.
• The arrangement contravened the true intention and definitional context of the Companies Act 1862.
• Allowing such arrangements would enable individuals to trade with limited liability, contrary to public policy.

The liquidator relied on the Court of Appeal’s judgment, which had found Mr. Salomon personally liable based on agency and trustee principles.[10]

Appellant’s (Mr. Salomon’s) Arguments:

• The company was properly incorporated according to all statutory requirements.
• The Companies Act of 1862 did not outline the specific level of interest that each shareholder was required to possess.
• The Act did not prohibit family members from being shareholders.
• Once incorporated, the company became a separate legal entity with its own independent rights and liabilities.
• The motives for incorporation were irrelevant if statutory requirements were met.
• All subscribers had informed, voluntary consent to the purchase price of the business; no misrepresentation or concealment occurred.
• Rescission was barred where no unconscionability existed, and the statutory scheme prevailed over equitable intervention.
• The debentures were validly issued and created a legitimate secured debt.

Judgment

The appellate committee of the House of Lords unanimously reversed the decision of the Court of Appeal. The court held that:

• Upon valid incorporation, Salomon & Co Ltd became an autonomous legal entity, distinct from its members.
• Incorporation shielded Mr. Salomon from personal liability, consistent with the principle of limited liability.
• The debentures held by Mr. Salomon were valid and enforceable.
• Salomon enjoyed preferential entitlement to the company’s assets before unsecured creditors. Broderip’s secured-creditor priority remained intact. No rescission or cancellation of debentures occurred. Unsecured creditors received residual assets only.
• Salomon & Co Ltd was not constituted as an agent or trustee of Mr Salomon.

Legal Reasoning / Ratio Decidendi

Lord Halsbury LC (Leading Judgment):

Lord Halsbury emphasised that the sole guide must be the statute itself. He examined whether the company was validly formed under the Companies Act 1862 and found all requirements satisfied. The Act required seven shareholders with at least one share each – this was met. The statute was silent on the degree of interest each shareholder should hold or their relationships to each other.[11]

His Lordship clarified that concerns over purpose or intent could not invalidate compliance with the Companies Act 1862. After incorporation, the company operates as its own legal person, with liabilities and obligations separate from those of its members. He criticised the Court of Appeal judges for their contradictory reasoning, particularly Vaughan Williams J’s agency argument, stating it was impossible to say simultaneously that there is a company and there is not.[12]

Lord Watson:

Lord Watson warned against the “slippery phrase “of “intention of the legislature,”[13] stating that courts can only ascertain legislative intent from what is enacted, not from speculation. He noted that creditors could have protected themselves by checking company records at Companies House before extending credit.[14]

Lord Herschell:

Lord Herschell observed that many reputable partnerships had converted to companies using similar structures. He acknowledged that one-man companies were not uncommon and that while the legislature might not have contemplated nominee shareholders, it had not prohibited them.[15]

Lord Macnaghten:

Lord Macnaghten sympathised with the unsecured creditors but concluded that their misfortune resulted from their inaction. He suggested legislative reform to give trade creditors preferential claims for recent debts, calling it a “scandal” that debenture holders could “sweep off everything.”[16]

Key Legal Principles Established:

1. Separate Legal Personality: Once a company is validly incorporated, it becomes a separate legal person distinct from its members, regardless of the distribution of shareholding or control.
2. Statutory Compliance: If statutory requirements for incorporation are met, the company’s existence cannot be challenged based on the promoters’ motives or the degree of control exercised by one person.
3. No Agency or Trust Relationship: A properly incorporated company is not automatically an agent or trustee for its controlling shareholder.
4. Validity of Security: Debentures and security interests granted by a company to its shareholders are valid if properly executed.

Conclusion / Observations

The Salomon decision represents a watershed moment in company law, establishing the fundamental principle of corporate personality that continues to govern modern corporate structures. The case’s significance extends far beyond its immediate facts, creating the legal foundation for:

• Single-member companies
• Corporate groups and holding company structures
• Asset protection through subsidiary companies
• Modern venture capital and private equity structures

However, the decision also revealed potential for abuse. The ability to incorporate with minimal capital while limiting personal liability has led to situations where creditors bear significant risks. Lord Macnaghten’s calls for preferential treatment of trade creditors presaged modern insolvency law reforms.

The case demonstrates the tension between strict statutory interpretation and broader policy concerns. While the Lords’ reasoning was legally sound, they acknowledged that the result might not align with the original legislative intent. This has led to the subsequent development of doctrines like “piercing the corporate veil” in exceptional circumstances involving fraud or improper conduct.

Although the lower courts applied competing equitable doctrines (agency, trust, nominee) to mitigate perceived unfairness, the House of Lords affirmed that equity cannot override clear statutory terms. This ongoing doctrinal struggle has a lasting impact on how the law balances corporate autonomy with minority shareholder protections and exceptions to limited liability.

Later cases such as Gilford Motor Co v Horne and Jones v Lipman[17] carved out narrow exceptions where the corporate veil could be pierced to prevent fraud. Most recently, the UK Supreme Court in Prest v Petrodel[18] reaffirmed the sanctity of corporate personality while clarifying that veil-piercing can only be justified when the corporate personality is employed as a vehicle for improper behaviour.[19] Lord Sumption formulated and identified the relevant wrongdoings through two principles, the “Concealment and Evasion principle”. Rather than disregarding the company’s separate status, the Concealment principle authorises courts to look behind the corporate veil to ascertain the legally relevant actors masked by it. By contrast, the evasion principle is engaged when a company is interposed to frustrate a legal right against its controller, allowing the court to disregard the corporate veil to enforce that pre-existing right. Veil piercing only occurs under the “evasion principle”. [20]

These developments build upon the foundation laid by Salomon v Salomon & Co Ltd, reinforcing its central place in company law.

The judgment’s legacy extends to contemporary doctrines: wrongful trading (Insolvency Act 1986 s 214)[21], directors’ duties (Companies Act 2006[22]) and modern veil‑piercing cases (Gilford Motor Co Ltd v Horne; Jones v Lipman[23] ; Prest v Petrodel Resources Ltd). These cases underscore the ongoing tension between statutory certainty and equitable safeguards.

With over a century of citations, Salomon remains the cornerstone of legal personality in common law jurisdictions, balancing legal certainty with evolving concerns about justice and accountability.

Reference(S):

[1] Salomon v Salomon & Co Ltd [1897] AC 22, [1896] UKHL 1

[2] Companies Act 1862

[3] Salomon (n1) 23-26

[4] Broderip v Salomon [1895] 2 Ch 323.

[5] Ibid 326

[6] Ibid 339

[7] Ibid 342,345

[8] Ibid 340

[9]  Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 (PC)

[10] Salomon (n1) 24-29

[11] Ibid 30-33

[12] Ibid 34-35

[13] Ibid 39

[14] Ibid 41

[15] Ibid 44

[16] Ibid 54

[17] Gilford Motor Co Ltd v Horne [1933] Ch 935

[18] Prest v Petrodel Resources Ltd [2013] UKSC 34.

[19] Ibid 28

[20] Ibid

[21] Insolvency Act 1986

[22] Companies Act 2006

[23] Jones v Lipman [1962] 1 WLR 832