SALOMON v. SALOMAN & cO. lTD.
(1897), A.C. 22
This case established the existence of the “veil of corporate personality” through which the identity of the members cannot be perceived, henceforth becoming one of the landmark cases of corporate law around the globe.
In this case, Mr. Salomon, who carried on a prosperous business as a leather merchant sold his business for the sum of 30,000 pounds to ‘Saloman & Co. Ltd.’, which consisted of Salomon himself, his wife and daughter and his four sons.
The purchase consideration was paid by the company by allotment of 20,000 fully paid one pound shares and 10,000 pounds in debentures conferring a floating charge over all the company assets, to Mr. Salomon.
One share of one pound each was subscribed for in cash by the remaining six members of his family. Salomon was the managing director and as held virtually the whole of its stocks, he had absolute control over the company.
One year later the company became insolvent and winding up commenced.
On winding up the statement of affairs were: Assets 6,000 pounds, Liabilities: Salomon as debenture holder 10,000 pounds and unsecured creditors 7,000 pounds. Thus, its assets were running short of its liabilities by 11,000 pounds.
The unsecured creditors claimed priority over Mr. Salomon, the debenture holder on the ground that a person cannot owe to himself and that Salomon and the company were one and the same person. They further contended that the company was a mere “alias” or agent for Salomon, the business was solely his, conducted solely for him and by him and the company was a mere sham, and fraud, hence Salomon was liable to indemnify the company against its trading debts.
The House of Lords held that the existence of a company is quite independent and distinct from its members and that the company’s assets must be applied in payment of the debentures first in priority to unsecured creditors.
The company is at law a different person altogether from the subscribers to the Memorandum; and though it may be that after incorporation the business is precisely the same as it was before, and the same persona re managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers, as members liable, in any shape or form, except to the extent and in the manner provided by the Act.
According to the Court even if a shareholder owns virtually the whole of its shares, the company is a separate legal entity in the eyes of law as distinguished from such a shareholder.
Thus, in this case the Court rejected the plea of the appellant and gave the decision in favour of the respondent.
– LAWZ BUREAU