FACTS:

Salomon transferred his business of boot making, initially run as a sole proprietorship,
to a company (Salomon Ltd.), incorporated with members comprising of himself and
his family. The price for such transfer was paid to Salomon by way of shares, and
debentures having a floating charge (security against debt) on the assets of the
company. Later, when the company’s business failed and it went into liquidation,
Salomon’s right of recovery (secured through floating charge) against the debentures
stood aprior to the claims of unsecured creditors, who would, thus, have recovered
nothing from the liquidation proceeds.

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

LEGAL GROUNDS

- Erlanger v. New Sombrero Phosphate Co. 3 App Cas 1218

- the Companies Act, 1862: Sect. 6, s. 8, art. 62 (e), s.46 part 3

- Baglan Hall Colliery Co. LR 5 Ch 346

REASON:
Based on Salomon… , I have found the reason why we have to consider a
company to legal person. As a separate legal entity subject to limited liability and
defined by share transferability, perpetual existence, flexible financing methods,
specialised management, majority rule and the other attributes or consequences of
incorporation, the corporation has many economically and socially beneficial
functions.
Firstly, as a separate entity, by separating the management from investment a
company enables the investing public to share in the profits without being involved in
management of business, in the meanwhile, professional managers can be hired by a
company to provide professional management of business and this may probably
result in a better profit.

Secondly, as a person created by law, the personality of the association is

highlighted. A company can ‘live’ long enough to carry on certain business without
worrying about biological death so it may reach the achievements made by
generations of members.
 Thirdly, according to limited reliability principle, investors are merely reliable
to the share which they subscribe for so that the risk of

investment has been reduced.

In sum, company as a vehicle of business can collect huge amount of outside

capital for business efficiently and provide considerable convenience and confidence
to the investors, consequently, investments are encouraged. Furthermore, economic
growth has been boost and the development of society is promoted.