Salomon v. A. Salomon & Co.

Salomon vs. A. Salomon & Co. Ltd. (1897) - the judgment that gave company law its foundation: once a company is registered, it is a separate legal person, different from the people who own it. Company law notes on LawEasy: https://www.thelaweasy.com/corporate-law-one-shot This video explains Salomon v. A. Salomon & Co. Ltd. step by step and answers one central question: if one man holds almost every share in a company, is the company really separate from him, or is it just him in another form? THE CASE Salomon v. A. Salomon & Co. Ltd. House of Lords | [1897] AC 22 Decided unanimously, reversing the Court of Appeal FACTS Aron Salomon ran a successful boot and shoe making business on his own. In 1892 he turned it into a limited company, A. Salomon & Co. Ltd. The law then required seven subscribers, so the shares were taken by Salomon, his wife and his five children. The company bought the business from him for about 39,000 pounds, well above its real value. Salomon was paid mostly in shares - he held 20,001 of the 20,007 shares - and he also took 10,000 pounds in debentures secured by a floating charge over the company's assets. He later used those debentures to raise a loan of 5,000 pounds from Edmund Broderip. The boot trade fell, the company went into liquidation, and its assets were not enough to pay everyone. As a secured debenture holder Salomon ranked ahead of the unsecured creditors, who would have received nothing. The liquidator argued that the company was a sham and that Salomon should personally indemnify it. ISSUES 1. Was A. Salomon & Co. Ltd. validly incorporated when six of the seven members held only one share each? 2. Was the company merely an agent or trustee for Salomon, making him personally liable for its debts? 3. Were Salomon's debentures and floating charge valid against the unsecured creditors? THE LOWER COURTS Vaughan Williams J. treated the other shareholders as dummies and held that the company had carried on business as Salomon's agent, so he had to indemnify it. The Court of Appeal reached the same result by a different route: Lindley L.J. held that the company was a trustee for Salomon, and that he had abused the privilege of incorporation, which Parliament had intended for genuine, independent shareholders. DECISION The House of Lords unanimously reversed the Court of Appeal. The company had been registered exactly as the Companies Act required. Nothing in the Act said that the subscribers had to be independent, or hold a substantial number of shares, or have a mind of their own. Once the company was registered it was a person in law, separate from its members. Salomon's motive in forming it was irrelevant, and his debentures were valid. Lord Macnaghten: "The company is at law a different person altogether from the subscribers." Lord Halsbury L.C.: "I have no right to add to the requirements of the statute, nor to take from the requirements thus enacted." PRINCIPLE A registered company is a separate legal person, distinct from its shareholders, directors and members. The company's debts are its own, and the members are liable only to the extent of their shares. This is the doctrine of separate legal personality, and the corporate veil is the line the law draws between the company and the people behind it. LIFTING THE CORPORATE VEIL The Salomon principle is the rule, but it is not absolute. Courts look behind the veil only in exceptional situations, such as fraud, a sham or facade, or the evasion of an existing legal obligation. Courts also refuse to treat a group of companies as one single economic unit merely because of common ownership or control. WHAT YOU WILL LEARN What separate legal personality means and where it comes from Why incorporation creates a brand new legal person What a debenture and a floating charge are, in simple language Why secured creditors are paid before unsecured creditors and shareholders What the corporate veil is and why it matters When courts will lift or pierce the corporate veil Why Salomon is still the cornerstone of modern company law CHAPTERS 00:00 Introduction - Salomon v Salomon & Co Ltd 00:43 Aron Salomon: the man behind the business 01:08 Incorporating A. Salomon & Co. Ltd. 01:42 Debentures and the floating charge 02:28 The company fails - who gets paid first? 03:24 The objection: agent, trustee or sham? 04:30 The core legal question 05:49 House of Lords: the decision is reversed 06:49 The corporate veil and the Salomon principle 08:38 Why separate legal personality matters 10:45 Lifting and piercing the corporate veil 13:08 When will courts lift the veil? Useful for LLB and LLM students, judiciary and other law exam aspirants, company secretary and CA students, advocates and teachers. #SalomonVSalomon #CompanyLaw #CorporateVeil #SeparateLegalEntity #CorporateLaw #LawEasy #LLB #LawStudents #JudiciaryExam #CaseLaw