Court – House of Lords
Case opinions – Lord Macnaghten, Lord Halsbury and Lord Herschell.
Keywords – Separate legal Entity (personality), Corporation.

Salomon v a Salomon & Co. Ltd. Is a landmark Case in UK court of Company law. The House of Lords upheld the doctrine of corporate personality, which is set out in the companies act, 1862. In a simple language creditors of an insolvent company can’t sue the company’s shareholders for any payment of outstanding debts.

Facts of the case:

  1. Mr. Aron Salomon was a sole trader of a boot and shoes manufacturing company in England. He then incorporated a company named Salomon & Co Ltd, to take over and carry on his business for £39,000. Now we look at the memorandum of company, they had 7 subscribers.
  2. The subscribers of Salomon & Co Ltd (Under the Companies Act 1862) were Salomon, his wife, his daughter and four sons, and they remained the only members of the company.
  3. Mr. Salomon held 20,000 shares whereas the other six shareholders held one share each. The company owed Mr. Salomon £10,000 and gave him debentures for this amount giving him a floating charge which entitled him to payment in case of liquidation of the company. Now what happens, that after a year the company goes into a phase of liquidation.
  4. When we look at the assets and liabilities of the company, it had a assets of total 6000 pounds and they had liability of total 17000 pounds. The division of 17000 was like that 10000 pounds gives to the Salomon and 7000 to the unsecured creditor.
  5. The Edmund Broderip (unsecured creditor) claimed that in reality the company and Mr. Salomon were the same entity so he didn’t deserve or claim the compensation out of liquidation.
  6. In the case it was claimed by certain Edmund Broderip (unsecured creditors) in the liquidation process of Salomon Ltd., in which Salomon was the majority shareholder, for Salomon to be made personally liable for the company’s debt.

Issues: Whether regardless of the separate legal identity of a company, Mr. Salomon should be made responsible for the company’s debts and shouldn’t be paid. He argued that Salomon had breached his fiduciary duty to the new company he was promoting by selling his business for an excessive price. He also argued that whole company in this way intended as fraud against the unsecured creditor in future.

Judgment: It was held that since a company is a separate legal entity distinct from its members Mr. Salomon, the founder of A. Salomon and Company, Ltd., be discharged from the personal liability to the creditors of the company.

The court also upheld the doctrine of corporate personality so that creditors of an insolvent company could not sue the company’s shareholders to pay up outstanding debts. It is to be observed that both the Courts treated the company as a separate legal entity distinct from Salomon and from the members.

Relevancy of the case: The concept of the lifting of the corporate veil was introduced after this case where no person could hide behind the company’s veil to commit fraud and avoid liabilities. This case is a landmark case in Company Law.

3.) Book Indian Company Law by Dr. Avtar Singh

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