Salomon v. A. Salomon & Co. Ltd.
A duly incorporated company is a legal person separate and distinct from its members, however few they are and however completely one of them controls it.
Citation
Salomon v. A. Salomon & Co. Ltd.
[1897] AC 22
- Court
- House of Lords
- Statute
- Company law — corporate personality
Facts, issue and held
Facts
Aron Salomon carried on business as a boot manufacturer. He incorporated a company to take over the business, with himself, his wife and his five children as the seven subscribers required at the time. The business was transferred to the company for approximately £39,000, satisfied by allotting Salomon around 20,000 fully paid shares of £1 each, issuing him debentures of £10,000 secured by a floating charge over the company's assets, and paying the balance in cash. Each of the other six members held a single share. Within a year the company fell into difficulties and went into liquidation, with assets insufficient to pay both the debenture and the unsecured creditors.
Issue
Whether the company was a separate legal person distinct from Salomon, or merely his agent or trustee — in which case he would be personally liable to indemnify the company against its trading debts and his secured debentures would rank behind the unsecured creditors.
Held
The House of Lords reversed the courts below and held unanimously that the company had been validly incorporated in compliance with the statute, and was therefore a separate legal person distinct from Salomon. It was neither his agent nor his trustee. His debentures were valid and he was entitled to rank as a secured creditor ahead of the unsecured creditors.
- Once the requirements of the incorporating statute are satisfied, the company is a distinct person in law with its own rights and liabilities.
- The motives of the subscribers in forming the company are irrelevant to the validity of the incorporation.
- The statute did not require the seven subscribers to be independent of one another or to hold any substantial stake.
- That one member holds effective control of the company does not convert the company into his agent.
Ratio decidendi
Ratio decidendi
On incorporation, a company becomes a legal person separate from its members; the members are not liable for its debts beyond their agreed contribution, whatever the degree of control any one of them exercises.
Why it matters
This is the foundational case of modern company law and the source of both limited liability in practice and the corporate veil. Every discussion of lifting the veil begins by acknowledging Salomon as the rule from which the exceptions depart.
Current standing
The principle remains good law and is expressly reflected in the Companies Act, 2013. Courts will nevertheless lift the corporate veil in defined circumstances — fraud, improper conduct, evasion of statutory obligation or where the statute itself so provides.
Using it in an answer
The principle of separate legal personality was laid down in Salomon v. A. Salomon & Co. Ltd. [1897] AC 22, where the House of Lords held that a duly incorporated company is a person distinct from its members, and that the motives of the subscribers do not affect the validity of the incorporation.
Applying that principle to the present facts, the company and its controlling shareholder are separate persons in law, and the shareholder is therefore not personally liable for the company's debts merely by reason of his control.
Accordingly, the claim against the shareholder in his personal capacity must fail unless one of the recognised grounds for lifting the corporate veil is established.
In the exam
Asked as a direct question on separate legal entity, and far more often as the authority you must cite in any practical problem about shareholder liability or lifting the corporate veil. Quoting it by name and year is expected at both Foundation and Intermediate.
Related cases
Have questions?
Find answers.
Still unsure about something? We're happy to help you figure it out.
Talk to usWhy is Salomon's case so important?
It established that incorporation creates a genuinely separate legal person, not a convenient label for the people behind it. Limited liability, the ability of a company to own property and contract in its own name, and the whole doctrine of the corporate veil all rest on this decision.
Does Salomon mean the corporate veil can never be lifted?
No. Salomon states the rule; lifting the veil is the exception. Courts will disregard separate personality where the corporate form is used for fraud, to evade a legal obligation or an existing liability, or where a statute expressly provides for it.
Please note
These summaries are prepared for CA exam preparation and are not legal advice. Case law develops — a decision may be distinguished, read down or superseded by later judgments or by legislative amendment. Verify the current position against ICAI's study material for your attempt and against the reported judgment before relying on any principle stated here.
You can recite Salomon. Can you apply it to new facts?
Generate practical case-based questions on this principle, attempt them under time, and get your answer evaluated for structure, citation and application.
Start practising free- Free to start
- Answer evaluation
- All 3 CA levels