Salomon v A Salomon & Co Ltd [1897] AC 22 is one of the most significant and enduring decisions in English company law. It firmly established the doctrine of separate legal personality, holding that a company duly incorporated under the Companies Act 1862 becomes an independent legal entity distinct from its shareholders.
The case clarified that the company’s debts are its own, and creditors cannot hold shareholders personally liable beyond the extent of their capital investment. The judgement of the House of Lords in Salomon v A Salomon & Co Ltd remains a foundational principle of corporate law in the United Kingdom and continues to influence courts globally.
Facts of Salomon v A Salomon & Co Ltd Case
Mr Aron Salomon, a leather boot and shoe manufacturer, had long operated as a sole proprietor. At the suggestion of his sons, who wished to participate in the business, he decided to convert it into a limited liability company. Consequently, A Salomon & Co Ltd was incorporated under the Companies Act 1862, with Mr Salomon, his wife, and five of his children as the seven shareholders required by statute. His two sons also became directors.
The company purchased Mr Salomon’s business for a price exceeding its actual market value. In payment, Mr Salomon received 20,001 of the company’s 20,007 £1 shares, thus retaining almost complete ownership. He was also issued £10,000 in debentures secured by a floating charge over the company’s assets. Using the security of these debentures, he obtained an advance of £5,000 from Mr Edmund Broderip.
Soon after incorporation, the company’s fortunes declined, and sales diminished. The company defaulted on interest payments owed under the debentures, prompting Mr Broderip to enforce his security. The company was placed into liquidation, and Broderip was repaid his £5,000. After this payment, the company’s remaining assets totalled only £1,055. Mr Salomon claimed this amount under his retained debentures, which, if accepted, would leave nothing for the unsecured creditors.
The liquidator, acting on behalf of the unsecured creditors, argued that A Salomon & Co Ltd was merely an agent or a façade for Mr Salomon, who should therefore be personally liable for the company’s debts. The central question before the courts in Salomon v A Salomon & Co Ltd was whether the company could be regarded as a distinct legal person or merely as an alias of its principal shareholder.
Issues
The principal issue in Salomon v A Salomon & Co Ltd was whether the company, despite formal compliance with the Companies Act 1862, was in substance identical to Mr Salomon himself. The liquidator contended that the company was merely an instrument used by Mr Salomon to shield himself from liability while continuing to conduct the same business.
The Court was asked to determine whether the company had a genuine existence as a separate legal entity or whether its formation was a scheme to defraud creditors. Additionally, the question arose as to whether Mr Salomon, as the controlling shareholder and secured creditor, should be personally liable to indemnify the company for its debts.
Judgement at Trial
At first instance, Vaughan Williams J held in Broderip v Salomon that Mr Broderip’s secured claim was valid, but he also found that A Salomon & Co Ltd was, in reality, the agent of Mr Salomon. The judge reasoned that the company was not formed in the true spirit of the Companies Act 1862, as it was never intended that one person should carry on business in this way under the guise of limited liability.
Vaughan Williams J described the other shareholders — Mrs Salomon and the children — as mere “dummies” who held shares only to meet the statutory requirement of seven members. He ruled that the company was essentially Mr Salomon in another form and therefore liable to indemnify him as its principal. The judge concluded that the company was a sham, created to evade personal responsibility, and ordered Mr Salomon to indemnify the company’s debts.
Judgement in the Court of Appeal
The Court of Appeal unanimously upheld the trial court’s decision against Mr Salomon. Delivering the leading judgement, Lindley LJ, an authority on company and partnership law, stated that while the company was incorporated in accordance with statutory requirements, it was nonetheless a mere device intended to enable Mr Salomon to conduct business with limited liability while avoiding responsibility for the company’s obligations.
Lindley LJ likened the company to a trustee rather than an agent and remarked that it had been improperly brought into existence to achieve an unlawful purpose. He emphasised that the Companies Act 1862 had been designed to confer limited liability upon genuine, independent shareholders and not upon those who used incorporation to mask sole proprietorship. He therefore held that Mr Salomon was bound to indemnify the company for its debts.
Lopes LJ and Kay LJ agreed with this reasoning, describing the company as a “myth” and a “fiction.” They maintained that A Salomon & Co Ltd was a mere scheme that allowed Mr Salomon to continue trading as before, only with protection from personal liability. The Court of Appeal’s judgement portrayed the incorporation as a misuse of the statute that undermined the rights of honest creditors.
Salomon v A Salomon & Co Ltd Judgement in the House of Lords
The House of Lords unanimously overturned the decision of the Court of Appeal, ruling in favour of Mr Salomon. Their Lordships held that the company had been validly incorporated and that once registered, it became a legal person distinct from its shareholders. The judgement in Salomon v A Salomon & Co Ltd therefore established the doctrine of separate legal personality as a cornerstone of company law.
Lord Halsbury LC observed that the Companies Act 1862 contained no requirement that shareholders be independent or unrelated. He stated that the court had no right to add limitations not found in the statute. Either the company existed as a legal entity or it did not — and since A Salomon & Co Ltd was duly incorporated, it had to be recognised as such. He concluded that the motives of those forming the company were irrelevant to determining its legal existence.
Lord Herschell agreed, highlighting the impracticality of the Court of Appeal’s reasoning. He noted that many companies were formed where several shareholders held minimal interest and had no active role in management, yet this did not invalidate their incorporation. He added that creditors dealing with such companies were presumed to understand their structure and could inspect the company’s register if they wished to know its ownership.
Lord Macnaghten delivered a judgement that has since become central to the understanding of corporate law. He declared that once a company is incorporated, “the company is at law a different person altogether from the subscribers to the memorandum.” He saw nothing improper in Mr Salomon’s actions, stating that he had merely exercised his rights under the law.
The creditors, having chosen to deal with the company, could not later claim against Mr Salomon personally. The House of Lords concluded that the company’s debts were its own and that Mr Salomon bore no personal liability beyond his capital contribution.
Legal Significance
The decision in Salomon v A Salomon & Co Ltd firmly enshrined the principle that a company has a separate legal personality from its shareholders. Once incorporated, a company may own property, incur debts, enter contracts, and sue or be sued in its own name. Shareholders are liable only to the extent of their shareholding, and their personal assets remain protected.
This principle has since been applied in numerous cases, including Macaura v Northern Assurance Co Ltd [1925] AC 619, where it was held that a shareholder could not claim insurance for company property, and Lee v Lee’s Air Farming Ltd [1961] AC 12, where the Privy Council confirmed that a controlling shareholder could also be an employee of the company.
The doctrine was reaffirmed in Adams v Cape Industries plc [1990] Ch 433, in which the Court of Appeal reiterated that the principle in Salomon v A Salomon & Co Ltd could not be disregarded simply to achieve fairness.
Despite its importance, the rule is not absolute. Exceptions have developed where courts may “lift” or “pierce” the corporate veil, particularly in cases involving fraud, sham, or evasion of legal obligations. The modern interpretation of these exceptions was set out in Prest v Petrodel Resources Ltd [2013] UKSC 34, where Lord Sumption distinguished between concealment and evasion as the only legitimate grounds for disregarding separate legal personality.
The principle in Salomon v A Salomon & Co Ltd has not been without criticism. Scholars such as Otto Kahn-Freund described the decision as “calamitous”, arguing that it enabled individuals to misuse limited liability. Nevertheless, leading judicial authorities have consistently upheld the case.
Lord Templeman in Williams & Humbert v W & H Trade Marks [1986] AC 368 called it an “orthodox” rule, and Lord Neuberger in Prest v Petrodel Resources Ltd reaffirmed it as “a clear and principled decision which has stood unimpeached for over a century.”
Conclusion
The ruling in Salomon v A Salomon & Co Ltd transformed English company law by establishing the enduring doctrine of separate legal personality. It confirmed that a company, once properly incorporated, exists as an independent legal entity distinct from its members, even if one person holds the majority of its shares. This principle provides the foundation for limited liability and has enabled the modern corporate structure to thrive.
While the courts have recognised narrow exceptions in cases involving fraud or sham, Salomon v A Salomon & Co Ltd remains the definitive authority. Over a century later, it continues to guide judicial reasoning and legislative policy, symbolising the autonomy of corporate identity and the limited liability of shareholders in English law.