SALOMON v A.

SALOMON

Citation: [1897] AC 22

INTRODUCTION
Separate legal entity or SLP is the basic tenet on which company law is premised. Establishing
the foundation of how a company exists and functions, it is perceived as, perhaps, the most
profound and steady rule of corporate jurisprudence. Contrastingly, the rule of “SLP” has
experienced much turbulence historically, and is one of the most litigated aspects within and
across jurisdictions. Nonetheless, this principle, established in the epic case of Salomon v
Salomon, is still much prevalent, and is conventionally celebrated as forming the core of, not
only the English company law, but of the universal commercial law regime

FACTS
Mr Salomon made leather boots or shoes in a large establishment. His sons wanted to become
business partners, so he turned the business into a limited company. The company purchased
Salomon's business on an excessive price for its value. His wife and five elder children became
subscribers and the two elder sons became directors. Mr Salomon took 20,001 of the company's
20,007 shares which was payment from Salomon incorporated for his old business (each share
was worth £1). Transfer of the business took place on 1 June 1892. The company also gave Mr
Salomon £10,000 in debentures. On the security of his debentures, Mr Salomon received an
advance of £5,000 from Edmund Broderip.

Soon after Mr Salomon incorporated his business there was a decline in boot sales. Salomon's
business failed, defaulting on its interest payments on the debentures (half held by Broderip).
Broderip sued to enforce his security. The company was put into liquidation. Broderip was
repaid his £5,000. This left £1,055 company assets remaining, of which Salomon claimed under
his retained debentures. This would leave nothing for the unsecured creditors. To avoid such
alleged unjust exclusion, the liquidator, on behalf of the unsecured creditors, alleged that the
company was sham, was essentially an agent of Salomon, and therefore, Salomon being the
principal, was personally liable for its debt. In other words, the liquidator sought to overlook the
separate personality of Salomon Ltd., distinct from its member Salomon, so as to make Salomon
personally liable for the company’s debt as if he continued to conduct the business as a sole
trader.

ISSUE
The case concerned claims of certain unsecured creditors in the liquidation process of Salomon
Ltd., a company in which Salomon was the majority shareholder, and accordingly, was sought to
be made personally liable for the company’s debt. Hence, the issue was whether, regardless of
the separate legal identity of a company, a shareholder/controller could be held liable for its debt,
over and above the capital contribution, so as to expose such member to unlimited personal
liability.

JUDGEMENT
The Court of Appeal, declaring the company to be a myth, reasoned that Salomon had
incorporated the company contrary to the true intent of the then Companies Act, 1862, and that
the latter had conducted the business as an agent of Salomon, who should, therefore, be
responsible for the debt incurred in the course of such agency.

The House of Lords, however, upon appeal, reversed the above ruling, and unanimously held
that, as the company was duly incorporated, it is an independent person with its rights and
liabilities appropriate to itself, and that “the motives of those who took part in the promotion of
the company are absolutely irrelevant in discussing what those rights and liabilities are”. Thus,
the legal fiction of “corporate veil” between the company and its owners/controllers4 was firmly
created by the Salomon case.

CASE ANALYSIS
The principle of separate corporate personality has been firmly established in the common law
since the decision in the case of Salomon v Salomon & Co Ltd, whereby a corporation has a
separate legal personality, rights and obligations totally distinct from those of its shareholders.
Legislation and courts nevertheless sometimes "pierce the corporate veil" so as to hold the
shareholders personally liable for the liabilities of the corporation. Courts may also "lift the
corporate veil", in the conflict of laws in order to determine who actually controls the
corporation, and thus to ascertain the corporation's true contacts, and closest and most real
connection. The 'veil of incorporation' can be described as being the separation between a
company and its members. Due to the separate legal status of a company from its members this is
usually very strictly maintained. However, there are certain circumstances when the courts will
deny the people who run the company the advantage of hiding behind the corporate veil. In these
instances the veil of incorporation is said to be 'pierced' or 'lifted', i.e. the barrier between a
company and its members is removed so there is no legal separation between them. There
instances are however, difficult to predict as the reasons depend on the judges interpretation of
"fairness" or "policy" or of how a particular statute should be interpreted

When a company receives a certificate of incorporation it has a 'separate legal personality'. In

law the company becomes a legal person it its own right. The fundamental concept to become
familiar with when starting up a business is the idea that the business has a legal personality in its
own right, particularly when it assumes the form of a limited liability company. This essentially
means that if one commences business as a limited liability company, then the corporation or
company is a legal entity with distinct legal personality separate to that of the owners, members,
or shareholders. This is known as the concept of legal personality.

The legal fiction of corporate veil, thus established, enunciates that a company has a legal
personality separate and independent from the identity of its shareholders. Hence, any rights,
obligations or liabilities of a company are discrete from those of its shareholders, where the latter
are responsible only to the extent of their capital contributions, known as “limited liability”. This
corporate fiction was devised to enable groups of individuals to pursue an economic purpose as a
single unit, without exposure to risks or liabilities in one’s personal capacity. Accordingly, a
company can own property, execute contracts, raise debt, make investments and assume other
rights and obligations, independent of its members. Moreover, as companies can then sue and be
sued on its own name, it facilitates legal course too. Lastly, the most striking consequence of
SLP is that a company survives the death of its members.