Salomon v Salomon - Case Summary

Legal Case Summary

Facts

Mr. Salomon sold his boot and leather business to a company, Salomon & Co. Ltd., which he formed for this purpose. The company's articles of association showed that the company's capital was £40,000, which consisted of 40,000 shares of £1 each.

Salomon took 20,000 shares, the other 20,000 remaining unallotted for the purpose of being sold to raise extra capital as and when required. He received £10,000 in debentures as security for the debt. When the company encountered financial difficulties, Salomon and his sons attempted to save it but eventually, it collapsed and liquidation commenced.

Issues

The central issue in the case was whether the company had a separate legal personality, and therefore its creditors could not sue Mr. Salomon personally for the company's debts. Another vital issue was whether the debentures held by Mr. Salomon were valid.

Analysis

The concept of corporate personality established in this case is a cornerstone of modern company law. It affirmed that a corporation is a separate legal entity from its shareholders and has rights and liabilities that are distinct from its shareholders.

However, the concept of 'corporate veil' emerged from this case that shields the company’s members from liability has drawn criticism, and may be lifted in cases of fraud, improper conduct or where justice demands.

Decision

The House of Lords unanimously overturned the decision of the Court of Appeal. They held that there was nothing in the Companies Act prohibiting a company from being formed for the sole purpose of buying the business of an existing businessperson. Furthermore, the company once formed was an independent legal person separate from its incorporators and shareholders, and hence Mr. Salomon was not personally liable to the company's creditors.

It was also held that the debentures were valid. Mr. Salomon as a secured creditor came before the other creditors in the liquidation proceedings.

References

• Salomon v A Salomon & Co Ltd [1897] AC 22
• Companies Act 1862
• P. MacCormick (1996), Companies: Law and Practice, Sweet & Maxwell

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Journalist Brief

In the milestone 'Salomon v Salomon' case, the court recognized the separate legal personality of a company. This means that a company can sue or be sued separately from its owners and holds its own assets and debts. Moreover, it affirmed the validity of a company being established to take over an existing business. This case greatly influenced future company law making it clear that as long as the company is legally incorporated, it exists as a separate legal entity, regardless of whether it's a one-man entity or not.

FAQs

What is the significance of the Salomon v Salomon case?

Answer: The case is a landmark in establishing the principle of 'corporate personality', treating a corporation as a separate legal entity.

Can a company be formed with the sole purpose of buying another's business?

Answer: Yes, as per this case, there is no legal barrier against forming a company for such a purpose.

What is meant by the 'corporate veil'?

Answer: It's a legal concept that separates the identity of a corporation from its shareholders, protecting them from being personally liable for company debts and obligations.