FACTUAL BACKGROUND
Appellant: Aron Salomon, a leather merchant and boot manufacturer, operated as A. Salomon & Co. for 30 years before incorporating a company, Salomon & Co. Ltd, in 1892.
Company Formation: Salomon & Co. Ltd was formed by Salomon, his wife, daughter, and four sons, fulfilling the statutory requirement of seven shareholders as per the Companies Act.
Share Distribution: The company’s capital was £40,000, divided into £1 shares. Salomon held 20,001 shares, and the remaining six family members held one share each.
Asset Transfer: Salomon transferred his business to the company for £38,782, receiving £6,000 in cash and £10,000 in debentures.
Debenture Issue: Salomon mortgaged these debentures to Edmund Broderip for a £5,000 loan. The company’s winding-up order in 1893 left unsecured creditors with £7,733 in debt.
“LEGAL PROCEEDINGS”
Trial Court (Vaughan Williams, J.):
- Declared that the company was entitled to indemnification from Salomon for £7,733.
Court of Appeal:
- Affirmed that the company was a “mere scheme” for Salomon to conduct business with limited liability and defraud creditors.
KEY LEGAL ISSUE
Whether Salomon & Co. Ltd. was a valid company, as per statutory requirements, or merely an extension of Salomon’s personal business aimed at avoiding liability?
DECISION OF HOUSE OF LORDS
The House of Lords rejected the Liquidator’s argument that Salomon’s company was merely a “one-man show” because he and his family members held almost all the shares. The Lords clarified that the Companies Act did not require subscribers to be unrelated or to hold more than one share each for valid membership. It made no difference to the company’s status if seven people held equal shares or if one person controlled nearly all the shares and profits. The law treats a company as an entity separate from its shareholders, regardless of who owns most of its capital. The Act does not mandate that subscribers must be independent, hold a substantial stake, or act with their own judgment and will.
- Lord Halsbury, L.C.:
- Recognized Salomon & Co. Ltd. as legally incorporated, noting that the Companies Act doesn’t mandate the degree of shareholder independence or interest.
- Stated that, as long as statutory requirements are met, motivations behind incorporation are irrelevant.
- Lord Watson:
- Supported that Salomon & Co. was validly incorporated and criticized the Court of Appeal’s view on fraudulent intent.
- Distinguished the case from Erlanger v. New Sombrero Phosphate Co., where fraud and misrepresentation were involved, unlike here.
CONCLUSION
The Salomon v. Salomon & Co Ltd case established the principle of corporate personality, where a company, once incorporated, is recognized as a separate legal entity distinct from its shareholders. The House of Lords overturned previous rulings, declaring that Salomon’s company was lawfully incorporated and his personal motivations in creating it did not affect its legal status. This case formed a foundational basis for the “corporate veil” doctrine, affirming that creditors cannot pursue personal assets of shareholders beyond what they invested in the company.
