Salomon v A Salomon & Co. Ltd: Brief Facts, Issues & Judgment

Salomon v Salomon & Co. [1897] AC 22

Company law, Corporate Veil, Separate Legal Personality, Lifting Corporate Veil

Facts

Mr Salomon was a leather merchant who incorporated his business as A Salomon & Co. Ltd.

He issued himself 20,001 of the 20,0007 shares and appointed himself as a director and secretary. His wife and five children held the remaining 6 shares. Mr Salomon issued himself debentures from the company. 

Debentures are essentially long-term loans and are sometimes secured by the assets of the company. This means that if the company does not repay the loan, the lender can sell the company's assets to recover the money.  

It is on the security of these debentures, Mr Salomon received a loan of £5,000 from Edmund Broderip for the company.

The company faced financial difficulties and failed to pay off the secured and unsecured creditors including Mr Broderip. Broderip resultantly sued to recover his monies. 

As a result, the company was put into liquidation, and Broderip was paid off leaving  £1,055 of the company assets. 

Salomon also claimed as a debenture holder to be paid by the company and its liquidator. 

The liquidator argued that the debentures Mr Salomon issued to himself were void and he was not entitled to payment because he was the company's controlling shareholder who issued the excessive debentures to himself.

Issue

Whether Mr Salomon was entitled to payment as a debenture holder despite being the company's controlling shareholder and a director?

Holding

The House of Lords unanimously held that Mr Salomon was entitled to payment as a debenture holder.

The court ruled that a company is a separate legal entity from its shareholders and Mr Salomon, as a shareholder, was entitled to sell his business to the company and be paid as a debenture holder.

The court also held that the company's debts were not void because they were issued in preference to other creditors, as long as the company was solvent at the time the debts were incurred.

Importance

Salomon v Salomon established the principle of corporate personality, also known as the "corporate veil," which holds that a company is a separate legal entity from its shareholders and shareholders are not personally liable for the company's debts.

This principle allows shareholders to limit their liability to the amount of their investment in the company and has been crucial to the development of modern corporate law.