Case Name: Salomon v A Salomon & Co Ltd (1897)
Background:
- Mr. Salomon had a successful leather-boot making business, conducted as a sole proprietorship.
- To take advantage of the benefits of limited liability, Mr. Salomon decided to incorporate his business as a limited company, A Salomon & Co Ltd, with himself as the majority shareholder.
- The company was formed with Mr. Salomon holding 20,001 out of the 20,007 shares issued, and his family members holding one share each.
Issue:
- The company faced financial difficulties and ultimately went into liquidation.
- Creditors argued that the company was a mere façade, and Mr. Salomon should be personally liable for the company’s debts.
Legal Principle:
- The House of Lords unanimously held that the company was a separate legal entity from its shareholders.
- The legal principle established in this case is often referred to as the “Salomon Principle,” emphasizing the separate legal personality of a company.
Rationale:
- The court upheld the concept of limited liability, stating that once a company is legally formed, it becomes an independent legal entity distinct from its shareholders.
- As a separate legal entity, the company could own property, sue, and be sued in its own right.
- The fact that Mr. Salomon and his family members were the primary shareholders did not negate the separate legal personality of the company.
Impact:
- The Salomon v Salomon case is a landmark decision and forms the foundation of company law principles regarding corporate personality and limited liability.
- It is considered a cornerstone case in corporate law, emphasizing the separation between a company and its shareholders.