Salomon v A Salomon & Co Ltd

Facts

Aron Salomon, a sole bootmaker, incorporated his business as a limited company in which he, his wife and five children were the seven subscribers; he held all but six shares and took debentures secured by a floating charge. When the company failed, the liquidator argued the company was a mere agent or alias of Salomon and that he should indemnify its debts, leaving unsecured creditors with nothing while Salomon recovered as a secured debenture-holder.

Issues

• Whether a company validly incorporated under the Companies Act becomes a legal person separate from its controlling shareholder.
• Whether Salomon could be treated as the company's agent or trustee so as to be personally liable for its debts.

Arguments

The liquidator/creditors argued the company was a sham or alias formed only to limit Salomon's liability and shield him while he extracted the business's value through secured debentures. Salomon argued the company was lawfully formed in compliance with the Act and was a separate person, so its debts were its own and his secured debentures ranked first.

Held

The House of Lords unanimously reversed the lower courts and held that the company was duly incorporated and was a real, separate legal person, not Salomon's agent or trustee. The Act required only seven subscribers and imposed no condition that they be independent or hold substantial stakes, so motive and control were irrelevant once the statutory requirements were met. Salomon's secured debentures were therefore valid and enforceable in priority to unsecured creditors. Lord Macnaghten famously affirmed that the company is at law a different person altogether from the subscribers.

Ratio decidendi

A company duly registered under the Companies Act is a legal entity distinct from its shareholders; its rights, liabilities and property are its own, and the corporate personality is not displaced merely because one person controls it or formed it to obtain limited liability.

Significance

The foundational authority worldwide for the separate legal personality of companies and the limited-liability principle; it remains the bedrock from which all veil-lifting exceptions are carved and is followed by Indian courts and adopted in cases such as Lee v Lee's Air Farming and Tata Engineering v State of Bihar.

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