SALOMON V SALOMON

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Salomon v Salomon & Co [1897] AC 22 was the seminal decision of the House of Lords relating to limited liability for the members of companies under English law.

Facts

Mr Salomon was a prosperous leather merchant, who decided to convert his business into limited company. He incorporated Salomon & Co Limited, with himself, his wife and his five children as directors. The company purchased the business as a going concern for £39,000 which was made up £20,000 in share capital, £10,000 in debentures and the remainder in cash.

The company ran into financial difficulties, and the debenture holders appointed a receiver. The receiver sold off all of the company's assets, which were sufficient to pay off the debenture holders, but nothing was left for the unsecured creditors.

The decision

At first instance and in the Court of Appeal, the courts felt that the whole transaction was a sham contrary to the intention of the Companies Act, and that the company was a sham and an alis, agent, trustee or nominee for Mr Salomon, and ordered him to indemnify the company's creditors against its trading debts.

But the House of Lords unanimously reversed the decision. They held that the company had been validly formed by the seven members taking shares, and that there was no requirement that they have a substantial interest in the undertaking, or involve themselves in its management. Nor did the law require that there be any balance of power between members under the company's constitution.

"Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not."

The court also layed down the fundamental premise of limited liability under common law legal systems in relation to company law thus:

"The company is at law a different person altogether from the [shareholders] ...; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any shape or form, except to the extent and in the manner provided for by the Act."