Salomon v A Salomon & Co Ltd [1897] AC 22 (HL)

Facts

• Mr. Aron Salomon operated a successful sole proprietorship in the leather business.
• He incorporated the business as a limited company, A Salomon & Co Ltd, under the Companies Act, which required at least seven shareholders.
• One share each was allocated to Salomon’s wife and five children; Salomon held the majority of shares and acted as principal shareholder and director.
• Salomon transferred his business to the company in exchange for shares and secured debentures, making him also a principal creditor.
• The company experienced financial difficulties and entered liquidation with minimal assets and substantial debts.
• The liquidator contended the company was a sham and sought to hold Salomon personally liable for company debts and to invalidate his secured debenture.
• The dispute centered on whether Salomon could be personally liable for the company’s debts, and whether the structure circumvented the Companies Act’s intent regarding limited liability and shareholder requirements.

Issues

1. Whether a company, once properly incorporated under the Companies Act, has a separate legal personality from its members.
2. Whether Mr. Salomon could be held personally liable for the company’s debts as principal shareholder, director, and secured creditor.
3. Whether a business structured as a limited liability company, but controlled by one individual, violates the statutory requirements or legislative intent of the Companies Act.
4. Whether a company in such circumstances is a mere agent or trustee of its controller, allowing courts to disregard its separate personality.

Decision

• The Court of Appeal found the company was an agent of Mr. Salomon and held him personally liable for its debts, treating the corporate form as a device to defraud creditors.
• The House of Lords overturned the Court of Appeal, ruling that:
  • A company properly registered in accordance with the statutory requirements possesses separate legal personality, irrespective of the identity or intentions of its controllers.
  • The motives or business structure behind incorporation do not affect the company’s legal status.
  • There was no legal basis to treat the company as an agent or trustee of Mr. Salomon, nor to impose personal liability for company debts beyond his shareholding.
  • The company’s distinct legal existence is solely determined by compliance with the Companies Act.

Legal Principles

• A properly incorporated company is a separate legal entity from its members, possessing its own rights and liabilities.
• The separateness of corporate personality is maintained even when one individual owns or controls the majority of shares.
• Courts will not disregard separate legal personality solely on the basis that the company serves the interests of a single individual, provided statutory requirements are met.
• Exceptions exist, such as piercing the corporate veil, but are reserved for cases of concealment, evasion of legal obligations, or abuse of the corporate structure.
• The doctrine clarifies that ownership and control do not make the company an agent or trustee for its controller.

Conclusion

Salomon v A Salomon & Co Ltd [1897] AC 22 (HL) established the principle of separate legal personality in company law, confirming that a duly incorporated company has its own legal existence, rights, and liabilities distinct from its members, and that limited liability applies even where one shareholder holds effective control, save for narrowly drawn exceptions such as abuse intended to evade legal obligations.