Salomon v A Salomon and Co Ltd

Salomon v A Salomon and Co Ltd 1897 AC 22 is the foundational decision in UK corporate law, establishing the concept of Separate Legal Personality.

Issue

The central legal issue was whether a company, once legally incorporated, is a truly separate and independent legal entity from its founder and principal shareholder, or whether the shareholder can be held personally responsible for the company's debts.

Specifically: Could unsecured creditors of a company sue the principal shareholder (Mr. Salomon) directly by arguing that the company was merely a "sham" or an "alias" for him?

Rule

The House of Lords established the fundamental rule of Separate Legal Personality (SLP) and the concept of Limited Liability:

1. The Company is a Person: Once a company is legally incorporated under the relevant Companies Act, it becomes, in the eyes of the law, a distinct legal person separate from its subscribers, shareholders, directors, and managers.

2. Assets and Liabilities: The assets, debts, and contractual obligations belong solely to the company itself, and not to the individual members.

3. Irrelevance of Control: It is irrelevant that one person controls virtually all the shares or runs the company as if it were their own sole proprietorship. The law recognizes the corporate entity as separate regardless of the economic reality.

   
   

Application

The House of Lords applied the established rule to the specifics of Mr. Salomon's situation:

• Valid Incorporation: Mr. Salomon had fulfilled all the formal and procedural requirements of the Companies Act 1862 (having the required number of shareholders, etc.).

• Separate Entity: Because the company was legally incorporated, A Salomon & Co Ltd existed as a legal person separate from Mr. Salomon. It had the capacity to contract, incur debt, and own property in its own name.

• The Corporate Veil: The court ruled that since the company was duly incorporated, it could not be described as an agent or trustee for Mr. Salomon. It was an entirely different legal being.

• Shareholder Protection: Therefore, the liabilities incurred by the company (its failure to pay its unsecured creditors) were the liabilities of the corporate entity alone. Mr. Salomon, as the shareholder, was protected by the veil of incorporation and his liability was limited to the price of his shares (which he had already paid).

Conclusion

The House of Lords reversed the decisions of the lower courts and found in favour of Mr. Salomon.

The decision confirmed that an incorporated company is a legal entity distinct from its members. This ruling is the cornerstone of modern corporate law, confirming that limited liability is a legal consequence of incorporation and is available even to "one-person" companies (where one person holds overwhelming control).