THE ICFAI UNIVERSITY DEHRADUN

SUMMER INTERNSHIP PROGRAM 2022

Student’s Name: Karan Upadhyaya

Enrolment Number: 17FLICDDN01057

Batch Name and Year: BBA LLB (2017-2022)

Case Title: Salomon v. Salomon & Co. Ltd.

Submitted by: Karan Upadhyaya

Submitted to: Dr. Ashish Singhal

ICFAI LAW SCHOOL

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 SALOMON v. SALOMON & CO. LTD.- THE CONCEPT OF SEPARATE LEGAL
ENTITY

CITATION: (1897) A.C. 22, [1896] UKHL 1

Decided in: The House of Lords, UK

FACTS OF THE CASE

Aron Salomon (the appellant) was a prosperous leather merchant and ran his business as a sole
proprietor in the year of 1892. On 1st of June 1892, Aron converted the sole proprietorship to a
limited liability company, with his wife, daughter and four sons were supposed to be the
shareholders and Aron Salomon would be the Managing Director of the company- Salomon &
Co. Ltd. The transaction for this transfer was supposed to be made to Salomon by way of shares,
and debentures. The appellant’s business was sold for £38,782 out of which £16,000 was to be
paid in cash and debentures. Out of the 20,007 shares, 20,001 shares were held by Mr. Salomon
himself and the rest were divided between the wife, daughter and four sons. However, the
company’s business failed later on in the month of October 1893. When the company was
winding up, the liquidator argued that the debentures held by Salomon had expired. The
liquidator alleged grounds of fraud to back up his argument. The liquidator thereby, brought an
action against Salomon to indemnify the debts of the company. During the preliminary trials, the
judge Vaughn Williams J. held up the liquidator’s argument. The judge ruled that since Salomon
had created the company with the sole reason of transferring his business to it, the company and
Salomon should be deemed to be one unit. The company in sooth was his agent and as the
principle (Managing Director) Salomon was liable for debts to the unsecured creditors.

ISSUE OF THE CASE

The liquidator alleged that Aron Salomon was guilty was not fulfilling his fiduciary duty to the
company by taking excessive money to sell his business to the other company. The major issue
of the case can be boiled down to one simple question: “Whether regardless of the separate
legal identity of a company, a shareholder could be held responsible for its debt, over and

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above the capital contribution, so as to make such member personally liable for the
company’s debt or not.”1

APPEAL AND DECISION

The decision by court of appeals was also against Mr. Salomon. The Lord Justices observed that
the said company was a myth and a fiction and said that the incorporation of such business by
Salomon was a mere scheme to enable him to enjoy the benefits of limited liability while being
able to carry on his business like before. Therefore, Mr. Salomon’s appeal was rejected, and the
company was declared to be made against the true intent of Companies Act, 1862, thereby
making Mr. Salomon liable to pay all costs carrying out the trust 2. It was finally held by the court
of appeals that Mr. Salomon’s acts were one of abuse of the privileges of incorporation and
limited liability. The legislature’s only intent was to confer such privilege upon the bona fide and
independent shareholders who had a free will of their own.

FINAL DECISION BY THE HOUSE OF LORDS AND REASONS

Lord Halsbury observed that once a company is legally incorporated as per the Companies Act
1892, it becomes an independent person of its own and has its own separate rights and liabilities.
Such rights and liabilities cannot and aren’t influenced by the motives of its promoters. The
company is a separate person and conducts its own business. So, the House of Lords reversed the
judgment in its entirety and delved deep into discussion regarding the existence of the company.
Through this landmark judgment the concepts about the formation and working of a company
and how the concept of Corporate Veil works was established. The House of Lords observed in
this case the Salomon had followed all the appropriate procedures to incorporate the company.

In this case it was held by the House of Lords that the company at law, is a separate person.
The House of Lords noted: “the company is at law a different person altogether from the
shareholders…; and though it may be that after incorporation the business is precisely the same
as it was before and the same persons are managers and the same hands received the profits, the
company is not in law the agent of the shareholders or trustee for them. Nor are the

1
PRIYANKA CHEMUDUPATI AND SWETLANA ROUT, CASE BRIEF SALOMON v. SALOMON. May 20, 2020
See, https://lawbhoomi.com/case-brief-salomon-v-salomon/.
2
Salomon v. Salomon. See, https://www.explore-law.com/salomon-v-salomon/.

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shareholders, as members, liable in any shape or form, except to the extent and in the manner
provided for by the Act.”3

CONCLUSION

This judgment is of a lot of significance as through this landmark judgment the concept of a
company having a separate entity and how the lifting of the corporate veil works was established.
As per the concept of lifting the corporate veil, no person can hide behind the company’s
separate entity to commit fraud and avoid liability utterly. However, the decision of this case has
faced many contradictions in recent cases such as Tokyo v. Karoon 4. However, this is due to the
fact that at the end of the day it falls upon the academicians, legal personnel and the courts to
interpret and properly justify the legislature’s intent behind the concepts of separate identity of a
company and the how lifting of the corporate veil works.

REFERENCES AND BIBLIOGRAPHY

1) The Landmark Case of Salomon v. Salomon & Co. Ltd., 1897, PARAG AGARWAL.
See, https://www.jusdicere.in/salomon-v-salomon-co-jusdicere/.
2) Salomon v. Salomon & Co. Ltd. [1897] AC 22.
See, https://www.explore-law.com/salomon-v-salomon/.
3) See, https://www.bailii.org/uk/cases/UKHL/1896/1.html.
4) Salomon v. Salomon: Case Summary.
See, https://www.lawteacher.net/cases/salomon-v-salomon.php.
5) Case Brief: Salomon v. Salomon, PRIYANKA CHEMUDUPATI and SWETLANA
ROUT, LAWBHOOMI.
See, https://lawbhoomi.com/case-brief-salomon-v-salomon/#PRESENT_STATUS.
6) Company Law and Practice, Taxmann, Dr. G.K. Kapoor and Dr. Sanjay Dhamija, 24 th
Edition August 2019.

3
Salomon v. Salomon & Co. [1897] AC 22; [1896] UKHL 1
4
Tokyo v. Karoon 1987 A.C. 45, 64.