Salomon v. A Salomon Co.

Ltd (1897)
This is the primary case that established the concept of the corporate veil. It is
a major decision in UK Company Law that firmly upholds the doctrine of
corporate personality as a separate legal entity, implying that shareholders
cannot be held personally accountable for the company’s insolvency.

Facts of the case

Mr Aron Salomon was a very successful leather dealer in the nineteenth
century, and his business was at its peak because he was the sole trader of
leather at the time. There was no one else in the company who could compete
with Mr Salomon. Mr Salomon then formed a corporation with 20007 shares, of
which he purchased 20001 and his family members, namely his wife and five
children, one each, purchased the remaining 6 shares. Mr Salomon established
a corporation and sold it to the company for 38,782 pounds. The business Mr
Salomon established a corporation and sold it to the company for 38,782
pounds. The firm paid Mr Salomon 20001 fully paid shares and 8,781 pounds in
cash, bringing the total amount paid by the company to Mr Salomon to 28,782
pounds (both in share and cash), with 10,000 pounds remaining payable to
Salomon by the company, which he secured with a debenture. Mr Salomon
followed all of the necessary rules and regulations for forming a business. There
were seven people in his company, but Salomon owned the majority of the
shares. He was also the company’s principal creditor at the same time.

Issue involved in the case

When the firm was wound up because it had failed, an issue was presented in
court to determine whether the secured loan of Mr Salomon would take
precedence over the non-secured debt of another creditor in the sum of 11,000
pounds. If the court awarded the secured loan priority over the unsecured loan,
the non-secured creditor would be left with nothing because the company’s
assets were so low. The company’s assets at the time of insolvency were only
7,000 pounds.

Arguments of the parties

Salomon moved the business to the firm on purpose, according to the liquidator
assigned to wound up the corporation. The liquidator further claimed that the
corporation worked as Salomon’s agent and that as the principal, he is
responsible for unsecured creditor debts.

Judgement of the Court

Decision of the Court

After hearing the case and considering the arguments of the liquidator, the High
Court determined that because the corporation was Mr Salomon’s agent, he was
held liable for all of the creditors’ obligations.

Appeal

Mr Salomon exploited the rights of incorporation and limited liability, thus his
appeal against the lower court judgement was likewise denied. Only those who
are loyal and fair stockholders are eligible for limited liability. Mr Salomon did
not use clear hands when forming the firm. He ran the firm as a sole trader.

The House of Lords

The House of Lords overturned both the lower court’s and the court of appeal’s
rulings, establishing a cornerstone basis for current business law. It was
unanimously agreed in the House of Lords that a company is a different legal
entity from its members and stockholders. All of the prerequisites for legitimate
business incorporation were met. The company’s memorandum of incorporation
had been signed by seven members. All of the subscribers had shares, and
there was no mention of independence. The House of Lords found that Salomon
Company was properly constituted in conformity with the law, that the
company’s obligations are its debts, and that the members are not accountable
for the company’s debts.

Final result

The stockholders followed all of the provisions of company law to incorporate

the firm as a legal entity. It makes no difference whether the firm is managed
by a single individual or by all of the owners; consequently, Mr Salomon’s
debenture was given priority.