Judgment
Delivered on 16 November 1896
Court: House of Lords
Panel: Lord Halsbury L.C., Lord Watson, Lord Herschell, Lord
Macnaghten, Lord Morris, Lord Davey
Judgment of the Court by: Lord Halsbury L.C. (Leading Judgment)
Subject Matter: Company Law – Corporate Personality –
"One-Man Company" – Limited Liability – Separate Legal Entity
Facts:
Aron Salomon, a successful leather merchant and boot manufacturer, incorporated
a company, A. Salomon and Company, Limited, with a nominal capital of £40,000
divided into 40,000 £1 shares. The subscribers to the memorandum of association
were Salomon himself, his wife, his daughter, and his four sons, each
subscribing for one share. The company then purchased Salomon's business for
£38,782, a price considered high by the liquidator. As part of the payment,
Salomon received £10,000 in debentures (a floating charge) and 20,000 £1 fully
paid shares. Salomon was the managing director. The company later fell into
financial difficulty due to trade depression and strikes, and a liquidator was
appointed. The company's assets were sufficient to pay the debenture holder
(initially Salomon, later assigned to a Mr. Broderip) but not the unsecured
creditors. The liquidator, on behalf of the company, brought a claim against
Salomon, arguing the company was a sham, Salomon's agent, or a fraud on
creditors, and sought rescission of the business transfer agreement and/or an
indemnity from Salomon for the company's debts.
Issues:
1.
Whether the
company was validly incorporated and a separate legal entity distinct from its
sole dominant shareholder, Mr. Salomon.
2.
Whether the
formation of the company and the subsequent transactions were a fraud upon the
Companies Act 1862 or the company's creditors.
3.
Whether Salomon
was liable to indemnify the company against the claims of its unsecured
creditors.
4.
Whether the
company was entitled to rescission of the contract for the purchase of the
business.
Holding:
The House of Lords unanimously held in favour of Mr. Salomon.
1.
The company was
a validly incorporated legal entity, distinct from its members. Once the
statutory requirements of the Companies Act 1862 (having seven subscribers, a
memorandum, etc.) were met, the company became a separate "legal
person" at law. The motives of the incorporators or the fact that one
shareholder held almost all the shares were irrelevant to its legal existence.
2.
There was no
fraud upon the statute or the creditors. The Act did not prohibit a sole trader
from incorporating a company to limit their liability. All transactions were
known to and approved by all shareholders. Creditors had notice they were
dealing with a limited company and could have inspected the public documents,
including the register of debentures.
3.
Salomon was not
liable to indemnify the company. The company was not his agent or trustee. As a
separate legal entity, it was responsible for its own debts. The relationship
between a company and its shareholders does not, in itself, create a duty for
the shareholders to indemnify the company.
4.
The company was
not entitled to rescission of the contract. All shareholders were fully aware
of the terms of the sale, and there was no independent board of directors to
defraud. Therefore, the company could not claim it was deceived into the agreement.
The decisions of the High
Court and the Court of Appeal were reversed. The principle of corporate
personality, often called the "veil of incorporation," was firmly
established, confirming that a properly formed company is a separate legal
entity from its shareholders, even if it is effectively controlled by one
person.