Salomon vs Salomon: Case summary

Salomon vs. Salomon is a landmark case in Company law that set up the principle of corporate
character and the idea of a Separate Legal Entity. This case, heard inside the House of Lords in
1897, laid the foundation for the present-day business enterprise shape and appreciably prompted
company regulations worldwide. In the area of Company law, the idea of a Separate Legal Entity
means that an organization is independent of its shareholders. This separation creates a Corporate
Veil, shielding shareholders from the employer’s money owed and liabilities.

Geeky Takeaways:
Name of the Case: Salomon v Salomon & Co. Ltd.
Citation: (1897) A.C. 22, [1896] UKHL 1
The concept of a Separate Legal Entity emerged after the case of Salomon vs Salomon.
In this case, it was held that no person could hide behind the company’s entity to commit fraud
and avoid any sort of liability.

Table of Content

Facts of the Case

Issue in the Case
Judgment/Ruling in Salomon vs Salomon
Corporate Veil
The Exception of Veil Piercing
Conclusion
Frequently Asked Questions (FAQs)

Facts of the Case

The story is about Aaron Salomon, a sole trader who runs a successful leather shoe business.
Wanting to get his sons involved in the business, Solomon A. decided to join the business.
Solomon owned most of this share. On incorporation, Salomon sold his business to a newly
formed company for £39,000. The issue arose when the company faced financial difficulties and
unsecured creditors sought to collect their loans from Salomon himself. The controversy arose
when the company went into bankruptcy, leaving unsecured creditors in a state where they were
unable to raise funds. The central question before the court was whether Aaron Salomon
personally could be held liable for the company’s debts despite the company’s separate legal
status. Creditors argued that the company’s arrangement was merely a front and that the
company was essentially acting as an agent for Aaron Salomon.

In other words, Salomon argued that once a company is incorporated, it assumes a distinct legal
personality separate from its shareholders.
He argued that this division should protect shareholders from personal liability beyond the
unpaid amount on their shares.

Issues in the Case

The two main issues that were raised based on the above facts were:
1. Whether Salomon & Co. Ltd. was a legally valid company?
2. Whether Salomon was liable for the debts of the company?

Judgment/Ruling in Salomon vs Salomon

In the Salomon vs. Salomon case, the House of Lords introduced a unanimous judgment that
installed the principle of a company’s Separate Legal Entity.
The court declared the company to be a myth, reasoned that Salomon had incorporated the
company contrary to the intent of the Companies Act, and the latter had conducted the business
as an agent of Salomon who should be responsible for the debts incurred in the course of such an
agency.
This separation, referred to as the Corporate veil, shields shareholders from legal responsibility
for the agency’s money owed.
The judgment reaffirmed that the liability of shareholders is restricted to the quantity unpaid on
their stocks.
This landmark judgment laid the muse for regulation influencing international corporate
practices and highlighting the importance of confined liability in corporate structures.
Hence, this Salomon vs Salomon case firmly created the legal concept of “Corporate Veil”
between the company and its owners.

Corporate Veil
The Corporate Veil is an idea that separates the identity of an employer from that of its
proprietors, shielding shareholders from personal liability for the corporation’s actions and
duties. Essentially, it creates a legal distinction between the corporation and its proprietors,
treating the employer as an independent and separate person.

Key traits of the Corporate Veil

1. Limited Liability: One of the primary purposes of the Corporate Veil is to provide
constrained liability to shareholders. This means that in the event of economic difficulties or
legal troubles faced by the corporation, shareholders are commonly not answerable for the
agency’s money owed beyond the amount invested in stocks.

2. Legal Independence: Once an organization is legally incorporated, it is recognized as an

impartial legal entity. This independence allows the corporation to enter into contracts, have
personal property, sue or be sued, and participate in different criminal acts on its call.

3. Perpetual Existence: The Corporate Veil also contributes to the idea of perpetual life. Even if
shareholders exchange, the enterprise maintains to exist as a separate legal entity, ensuring the
continuity of business operations.

4. Separation of Ownership and Control: The separation of possession and control is a

characteristic of the corporate veil. Shareholders generally delegate the day-to-day control and
decision-making to a board of administrators and government officers.

Exception of Veil Piercing

The exception of Veil Piercing is a prison doctrine that permits positive instances to set aside the
safety provided using the Corporate Veil, thereby conserving shareholders or directors who are
responsible for the actions or debts of an organization. While the corporate veil usually shields
shareholders from private obligation, the exception of veil piercing is invoked when there is an
abuse of the corporate form or when justice needs that the individuals at the back of the
employer should be held accountable. Key conditions in which the court would possibly apply
the exception of Veil Piercing are as follows:

1. Fraud or Wrongdoing: If the company shape is used to perpetrate fraud, conceal unlawful
sports, or interact in wrongdoing, the court may also pierce the corporate veil to expose the
individuals accountable.

2. Evasion of Legal Obligations: When a corporation is mounted or operated to intentionally

keep away from legal obligations, which include contractual obligations or statutory necessities,
the court may additionally disregard the corporate veil to prevent injustice.

3. Alter Ego or Agency: If a business enterprise is deemed an alter ego or mere agent of its
proprietors, and not using a real separate identification, the courtroom may additionally pierce
the veil to deal with the moves of the company as those of the people behind it.

4. Undercapitalization: In cases where an organization is inadequately capitalized, and it

becomes glaring that the organization cannot meet its economic duties, the courtroom may
additionally pierce the veil to shield the pursuits of creditors.

5. Unfairness or Injustice: Maintaining the Corporate Veil would cause unfairness or injustice,
and the courtroom can also interfere. This may involve conditions where the organization is used
to guard an individual’s belongings from legitimate claims.

Conclusion
Salomon vs. Salomon remains a cornerstone in company regulations. The case underscores the
significance of an employer’s separate personality, presenting safety to shareholders and
fostering financial increase via encouraging funding. While the corporate veil presents a shield
against personal legal responsibility, the exception of veil piercing exists to prevent abuse of the
company shape.

Frequently Asked Questions (FAQs)

1. Can the Corporate Veil be pierced in any situation?
Answer:

No, the court will simplest pierce the corporate veil in first-rate circumstances, which include
fraud, evasion of legal responsibilities, or perpetration of injustice.

2. Why is the Separate Legal Entity considered important for groups?

Answer:

The Seperate Legal Entity precept protects shareholders from personal liability for the agency’s
debts, encouraging funding and fostering monetary boom.

3. What turned into the importance of the Salomon vs. Salomon case in law?
Answer:

The case established the precept of corporate personality, solidifying the idea of a separate prison
entity for agencies and influencing company regulation globally.

Salomon v. Salomon & Co. Ltd. is a Landmark case in company law that established a
fundamental principle in corporate jurisprudence. It firmly established the idea that a corporation
is a separate legal entity from its shareholders. This notion, commonly known as the "corporate
veil," is a cornerstone of both English company law and international commercial law.

The House of Lords ruled in this case that a company should be recognized as a legal person, an
artificial entity with its own rights and duties. This legal identity separation protects stockholders
from personal culpability for the company's conduct or obligations. Even if a shareholder holds a
majority of the company's shares, they are protected from being personally responsible for the
company's losses or obligations.
Salomon v Salomon & Co. Ltd. ensures the protection of shareholders' interests and upholds
the true spirit of the Companies Act by preserving the autonomy and limited liability of a
company's members. This legal principle remains a foundational concept in company law,
essential for any aspiring law student to understand.

Court: House of Lords

Title of the case: Salomon v. Salomon & Co. Ltd.
Citation: [1896] 11 WLUK 76
Decided On: 16 November 1896
Location: House of Lords, United Kingdom
Judges: Lord Halsbury LC, Lord Watson, Lord Herschell, Lord Macnaghten, Lord Morris, Lord
Davey

Facts of the case

Aron Salomon, the Appellant in this case, operated a successful boot manufacturing business as a
sole trader. His objective was to transfer this business into a joint-stock company, which was
intended to include his family members as shareholders. To formalize this arrangement, a
preliminary agreement was established, specifying that part of the payment for the business
would be made in the form of debentures issued by the company.

On July 28, 1892, a Memorandum of Understanding (MoU) was executed, involving Aron
Salomon, his wife, and his five children as shareholders, each holding a single share, while the
majority of 20,001 shares were held by Aron Salomon himself. Subsequently, "Aron Salomon
and Company, Limited" was duly incorporated.

As part of the financial structure, additional debentures were issued to Edmund Broderip, a
secured creditor, in order to secure the repayment of his loan at an interest rate of 8%. When the
company defaulted on the interest payments, Mr. Broderip initiated legal action to liquidate the
company.

Following the court's order for liquidation, a liquidator was appointed to oversee the process,
primarily in response to the demands of unsecured creditors of the company. After the settlement
of Mr. Broderip's claims, Aron Salomon contended that he was entitled to the repayment of his
debentures before any distribution was made to the unsecured creditors.

To counter what he perceived as an unjust impediment, the liquidator, representing the interests
of the unsecured creditors, asserted that the company was a mere fa�ade, and that Aron
Salomon effectively functioned as the company's agent. As a result, the liquidator argued that
Salomon should be personally liable for the company's debts.
Issues:
 Whether there was a valid constitution of a joint stock company?
 Whether the company was defrauded by the appellant?
 Whether the unsecured creditors were defrauded by the appellant?
Respondent Contention
The respondent strongly asserted that creditors had the autonomy to ascertain their respective
share and the identity of the shareholders who held these proportions. They argued that this
transparency was consistent with the principles of corporate governance and the Companies Act
1862.

They further emphasized that there were no objections raised under Sections 6, 8, 30, 43, or any
other relevant section of the Companies Act 1862 against the formation of a company for the
objectives pursued by Salomon and Co. Therefore, the Appellants contended that the company
had fulfilled all legislative criteria necessary for it to be recognized as a bona fide and legitimate
entity. As such, it should be treated as a separate legal entity, characterized by its own distinct
and independent corporate status.

The respondent pointed out that the lower courts had created ambiguity by oscillating between
considering Salomon and Co. as a substantial entity and portraying it as fictitious. They urged the
courts to resolve this inconsistency by making a clear determination.

Lastly, the respondent emphasized that the absence of personal liability imposed on shareholders
for a company's debts, as stipulated by the legislature, meant that the courts should refrain from
contravening these legislative provisions by imposing such liability. This underscored the
importance of adhering to the principles and legal framework set out by the legislature.

Defendant Contention:

 The respondent established the company without an independent board of directors,

maintaining complete control over its affairs. It was contended that he acted as the
principal of the company and operated it according to his personal preferences and
desires.

 The defendants alleged that the Appellant took debentures and intentionally concealed
this fact from the creditors. This concealment was seen as an attempt to gain an unfair
advantage over other creditors, allowing the Appellant to secure preferential treatment.
  Despite the company's incorporation in accordance with the Companies Act, the
defendants argued that it never truly operated as an independent entity. They asserted that
the other directors, who were family members of the Appellant, and the company itself
were always under the complete control of the Appellant.

 Due to his substantial majority of shares, the Appellant was portrayed as the sole master
of the company, enjoying unchecked authority to make decisions at his discretion.

Judgment:

 The House of Lords affirmed that the company was a validly established entity under the
Companies Act and met all legal requirements. Consequently, all transactions, including
debenture allotment, were deemed legally sound. Shareholders' personal liability was
limited to their subscribed shares, as the company was recognized as a separate legal
entity.

 The sale of the boot and leather business from the appellant to the limited liability
company was deemed valid and the sale price reasonable. Shareholders were well-
informed and ratified the transaction, dispelling any fraud allegations.

 The composition of the company's shareholders, including the appellant and his family
members, holding one share each, did not invalidate the company. Holding a single share
was sufficient for shareholder status, and the relationships among shareholders were
deemed inconsequential.

 The House of Lords stressed that the Companies Act's true intent should guide
interpretation. Motives and conduct of promoters were irrelevant once the company was
lawfully incorporated, treated as an independent entity.

 Shareholders voluntarily collaborated to protect their interests, acting in good faith. They
transferred a solvent business to limit their liabilities, with no grounds for fraud
allegations.

 The House found that unsecured creditors were not defrauded, as the law allowed them to
examine share and debenture holdings. Creditors' failure to exercise these rights was
deemed negligent.
Ratio Decendi:

 Separate Legal Entity: The House of Lords affirmed that the company became a distinct
and separate legal entity upon its lawful incorporation. Therefore, the principle of
piercing the corporate veil should not apply. Consequently, shareholders should not be
personally liable for liabilities beyond their subscribed shares, as the Companies Act
imposes limitations on liability.

 One Shareholder Suffices: According to the Companies Act of 1862, it was adequate for
an individual to hold just one share to be recognized as a shareholder. The relationship
among shareholders or the authority and influence they held did not determine their status
as shareholders. In this case, the six other family members of the appellant, each holding
one share, were considered valid shareholders, even though they were essentially passive
in their roles. Once a company was properly incorporated, all its transactions were
inherently valid and lawful.

 These principles underscore the importance of upholding the legal distinction between a
company and its shareholders, emphasizing the limited liability of shareholders and the
validity of corporate transactions once a company is duly incorporated under the law.

Current Scenario
The Salomon v. Salomon case, although historically significant, has faced challenges and
limitations in contemporary legal interpretations. Recent judgments and cases have questioned
and revised the Salomon principle. Here is the present status:

Tokyo v. Karoon: Recent cases like Tokyo v. Karoon have deviated from the traditional
Salomon approach. These cases suggest a shifting perspective on corporate veil piercing and
indicate a departure from the strict adherence to Salomon.

VTB Capital Plc v. Nutritek International Corporation: In this case, the courts reaffirmed the
limited scope of piercing the corporate veil as an equitable remedy. This underscores a more
cautious and restricted approach to veil piercing in modern legal contexts.

Prest v. Petrodel: In a significant decision, Sumption J. in the Prest v. Petrodel case narrowed
the circumstances under which the corporate veil could be lifted to only two principles: the
"concealment principle" and the "evasion principle." This decision refocused the analysis away
from the broad factual corporate veil and reemphasized the Salomon Principle, placing stricter
limits on piercing the corporate veil.

In summary, the Salomon principle, while historically influential, has encountered challenges
and modifications in recent legal interpretations. Contemporary cases have redefined the scope
and circumstances for piercing the corporate veil, emphasizing a more limited and cautious
approach.

Conclusion
The landmark case of Salomon v. Salomon & Co. transformed the corporate landscape by
firmly establishing the concept of the separate legal personality of joint-stock companies. It
emphasized that the corporate veil could not be easily pierced to jeopardize the rights of
shareholders.

Once incorporated, a company was recognized as having a distinct legal identity independent of
its founders and shareholders. This ruling marked a revolutionary shift in the realm of
shareholder rights within the corporate environment, safeguarding the principle that a company's
liabilities remained separate from those of its individual members.