Salomon v. Salomon: Corporate Veil

Overview of Salomon v. Salomon & Company Ltd

• This case concerns with the concept of "lifting the corporate veil" in company law.
• "Lifting the corporate veil" is when a court ignores a corporation's separate legal existence.
• This exposes the individuals behind the company to personal liability for the corporation's actions.
• The case questions if the company and its holder are distinct and whether either is liable for the company's losses.

Background Facts

• Prior to the company's incorporation, Mr. Salomon ran a successful leather business as a sole trader.
• In 1892, Mr. Salomon converted his business into Salomon & Co. Ltd., a private limited company, under the Companies Act, 1862.
• The company's nominal share capital was £40,000, divided into 20,000 shares at £1 each.
• Mr. Salomon acquired 20,001 shares with 20,000 shares for himself and one share for each of his family members to meet minimum shareholder requirements.
• Salomon provided the company with a loan of £10,000, receiving debentures (secured loan) as a security interest.
• He received 20,000 fully paid-up shares for his business transfer with family receiving the remaining 1,000 shares.
• Salomon also received a debenture for £10,000.
• Salomon retained control as managing director, while family members had passive roles.
• The company faced financial struggles, partly due to an economic downturn.
• It had trouble repaying the debentures held by Mr. Salomon.
• The company eventually went into liquidation.
• The liquidator aimed to treat the company as a mere front and sought to lift the corporate veil.
• The liquidator attempted to make Mr. Salomon personally responsible for the company's liabilities.

Issues at Hand

• Determination of whether Salomon & Co. Ltd was a valid company.
• Determination of whether Salomon was personally responsible for the company's debts.

Court Ruling and Observations

• The House of Lords emphasized the importance of corporate entity with separate rights and responsibilities.
• The court confirmed the validity of the company's incorporation when requirements were met meaning the company became a separate entity.
• Limited liability of shareholders was affirmed, with liability limited to the nominal value of shares.
• Mr. Salomon, as majority shareholder, was not personally liable for company debts beyond unpaid share amount.
• The ruling emphasized respecting the corporate structure and not easily dismissing a company's separate legal identity.

Conclusion

• The House of Lords decided that business belonged to the company, not Salomon.
• Salomon was not responsible for covering the company's debts.