Case Details: Salomon v. Salomon & Company Ltd
Case Citation – (1897) A.C. 22, [1896] UKHL 1
Date of Judgment: November 16, 1896
Jurisdiction : UK – House of Lords
Nature of case: Company Law
Bench: Lord Halsbury LC, Lord Watson, Lord Herschell, Lord Macnaghten, Lord Davey, and Lord Morris.
Introduction
This case concerns the doctrine of lifting the Corporate Veil under the Company Law. The term refers to a legal principle whereby courts disregard a company’s separate legal identity to hold the individuals behind it personally liable for its actions. In this case, the central issue was whether the company and its principal shareholder should be treated as distinct entities or whether the shareholder could be held personally liable for the company’s losses.
Case Background
Before the incorporation of the company in question, Mr. Salomon successfully operated a leather business as a sole proprietor. In 1892, he decided to convert his business into a private limited company, Salomon & Co. Ltd under the Companies Act, 1862. The company was established with a nominal share capital of £40,000 divided into 20000 shares of £1 each.
To meet the statutory requirement of having a least seven shareholders, Mr. Salomon subscribed to 20001 shares, retaining 20000 for himself and allotting one share each to his wife, daughter, and four sons.1 This distribution, while compliant with the law, ensured that Salomon retained full control over the company.
In forming the company, Salomon also extended a loan of £10000 and secured this by taking debentures. In return for transferring his sole proprietorship to the company, he received 20000 fully paid-up shares and a debenture of £10000, while the remaining £ 1000 shares were nominally distributed among his family. Despite the shareholding structure, Salmon remained the de facto controller and managing director, with his family members playing only a passive role.
However, the company later suffered financial difficulties due to economic downturns and was unable to repay the debentures held by Mr. Salomon. Eventually, the company went into liquidation, prompting the liquidator to argue that the company was merely a façade and that the corporate veil should be lifted to hold Mr. Salomon personally liable for its debts.
Issues Raised
Whether Salomon & Co. Ltd. was a separate legal entity, distinct from Mr. Salomon, despite his complete control and majority shareholding in the company?
Whether Mr. Salomon could be held personally liable for the company’s debts, by lifting the corporate veil and treating the company as a mere agent or (façade) of his sole proprietorship?
Legal Provision
Companies Act,1862(UK): Governing incorporation and corporate structure at the time.2
Doctrine of Separate Legal Personality: The notion that a duly incorporated company exists as a separate legal entity from its shareholders.
Principle of Limited Liability: Shareholders are only liable up to the amount unpaid on their shares.
Contentions by the Parties
- In this case, the liquidator argued that Salomon & Co Ltd. It was not a truly independent entity, but rather a device created to shield Mr. Salomon from personal liability. It was contended that Salomon continued to run the business in the same manner as before incorporation and that the company merely acted as his agent. Therefore, the liquidator claimed that Mr. Salomon should be personally liable for the company’s debts.3
- In response, Mr. Salomon maintained that the company was duly incorporated under the Companies Act and had complied with all statutory requirements. He argued that the company was a separate legal entity, and as such, he could not be held personally liable beyond his capital contribution.4 He also asserted that his rights as a secured debenture holder were legitimate and enforceable.
Decision by the Court : Salomon v. Salomon & Company Ltd
The Court of Appeal held that Salomon & Co. Ltd was a mere sham, contrary to the intent of the Companies Act 1862, and operated as an agent of Mr. Salomon, making him personally liable for its debts. However, the House of Lords reversed this decision, ruling that since the company was legally incorporated, it was a separate legal entity with its own rights and liabilities, regardless of the promoter’s motives.
Ratio Decendi
The central legal reasoning was that once a company is legally formed, it is a separate and independent legal entity regardless of whether one person controls the majority of shares. The motives of incorporation and the structure of shareholdings are irrelevant if statutory requirements are met.
Corporate Veil
The Salomon case firmly established the principle of Separate Legal Personality, which has since been upheld in cases like Macaura v. Northern Assurance Co.5, Lee v. Lee’s Air Farming Ltd.6, and Farra’s case7. This legal fiction, known as the corporate veil which recognizes a company as a separate entity from its shareholders, who are only liable up to their capital contributions, known as limited liability. It allows individuals to operate collectively without personal risk, enabling the company to own property, enter into contracts, incur debts, and sue in its own name. The most important thing is that the company’s existence continues even after the death of its members.
Exception to the Corporate Veil
Like most legal principles, the rule of Separate Legal Personality has exceptions. Courts may pierce the corporate veil to hold individuals being a company personally liable, especially in cases involving fraud, sham, agency, group enterprise, or injustice. This was notably discussed in Adams v. Cape Industries8 and later applied in cases like Backett Investment Management v. Hall Stone9 & Rolls v. Moore Stephens10 and Akzo Nobel Vs. The Competition Commission11. While the development of these exceptions in English law has been complex, veil piercing is now also recognized through various statutory provisions.12
Case Observation
The House of Lords emphasized the formality and validity of incorporation over the intent or economic reality.13 Lord Macnaghten famously observed that
“the company is at law a different person altogether from the subscribers and though it may be that after incorporation the business is precisely the same as it was before, also the company is not in law the agent of the subscribers or trustee for them”.
Conclusion
The concept of lifting the corporate veil evolved after the Salomon case to prevent misuse of the corporate form. However, in this present case, the court found no fraud. Mr. Salomon had acted legally, and as a secured creditor, he was entitled to repayment before unsecured creditors during the company’s liquidation. The ruling reaffirmed the principle of separate legal personality.
- https://www.studocu.vn/vn/document/truong-dai-hoc-luat-ha-noi/ky-nang-nghien-cuu-va-phan-tich-an-le/al2-salomon-v-salomon-co-ltd-house-of-lords-judgment-analysis/131872479 ↩︎
- https://en.wikipedia.org/wiki/British_company_law ↩︎
- https://onlinelegaladvisor.in/famous-case-laws/famous-case-law-salomon-v-a-salomon-co-ltd-1897 ↩︎
- https://quizlet.com/gb/790375316/3companies-limited-liability-and-the-corporate-veil-flash-cards/ ↩︎
- 1925 AC 61 ↩︎
- 1961 AC 1 ↩︎
- (1888) 40 ChD 39 ↩︎
- 1990 Ch. 433 ↩︎
- 2009 1 A.C. 1391 ↩︎
- 2009 UKHL 39 ↩︎
- 2013 CAT 13 (21 June 2013) ↩︎
- https://legalbots.in/blog/case-study-salomon-v-salomon-co-ltd#4 ↩︎
- https://www.parliament.uk/business/lords/work-of-the-house-of-lords/what-the-lords-does/ ↩︎
