Salomon v Salomon & Co Ltd (1897)
Mr. Salomon had a boot manufacturing business which he decided to incorporate into a
private limited company. He sold his business to the newly formed company, A Salomon
& Co Ltd, and took his payment by shares and a debenture or debt of £10,000. Mr.
Salomon owned 20,000 £1 shares, and his wife and five children owned one share each.
Some years later the company went into liquidation, and Mr. Salomon claimed to be
entitled to be paid first as a secured debenture holder. The liquidator and the other
creditors objected to this, claiming that it was unfair for the person who formed and ran
the company to get paid first. However, the House of Lords held that the company was
a different legal person from the shareholders, and thus Mr Salomon, as a shareholder
and creditor, was totally separate in law from the company A Salomon & Co Ltd. The
result was that Mr Salomon was entitled to be repaid the debt as the first secured
creditor.
Facts
The facts of the Salomon case were that Mr. Salomon ran a successful leather business as a sole
trader. He then set up a company in which he was the main shareholder. He loaned the
company money which he secured with the assets of the company. He observed the tenets of
company law at all times. He was also the main shareholder and further to that the main creditor
due to the loan. The question in this case was whether Mr. Salomon debts should take
precedence over the unsecured creditors when the company was wound up. If Mr. Salomon
won the case, the creditor would receive no money.
The most important decision ever made by the English courts in Relation to company law is
Salomon v A Salomon & Co. Ltd (1897). The vital perception to become familiar with when
starting a business is the idea that the business has a legal personality in its own right, mostly
when it assumes the form of a Limited Liability Company. This basically means that if someone
starts a business as a Limited Liability Company, then the Company is a legal entity with
separate legal personality, would be separate to that of the owners, members, or shareholders.
As a separate entity, the company is different from the directors, employees and shareholders.
The House of Lords in the Salomon case confirmed the legal principle that, upon incorporation,
a company is generally considered to be a new legal entity separate from its shareholders. The
court did this in relation to what was essentially a one person Company, which is Mr Salomon.
At a specific level, however, it was a bad decision. By extending the benefits of incorporation to
small private enterprises, Salomon’s case has upheld fraud and the evasion of legal obligations.
A corporation is a separate legal entity from its owners. In other words, if a corporation,
in the course of doing business, is involved in any legal action, then the corporation, for
legal purposes, is its own person. The corporation is liable for its taxes – not the owner.
This is how corporations may sue and be sued, and their assets are tracked separately. If
a corporation is sued, then the owners will not have their personal belongings at risk
unless those belongings were purchased with illegal returns from the corporation.
In a sole proprietorship or partnership, the owners personally liable. For all intents and
purposes, all acts taken by these two company types are taken by the owners
themselves. The company becomes a legal person in its own right, distinct from the