Salomon V a Salomon & Co Ltd (1897) AC 22 – Case Law Analysis

This is the foundational case and precedence for the doctrine of corporate personality and the judicial guide to lifting the corporate veil. The doctrine of separate legal entity was originated from this case. The House of Lords in the Salomon case affirmed the legal principle that, upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders.

The court did this in relation to what was essentially a one person Company. 

A company registered under the Acts is an artificial legal entity separate and apart from the members of which it is composed. These become basic principle of company law which has several important consequences, it become helpful for the member it mitigate the liability of them.The principle from the case is very simple – a company is a separate legal entity and thus a juristic “person” in the eyes of the law. Salomon was a boot and Shoe manufacturer. His business was sound condition and there was a surplus assets over the liabilities. He incorporated a company named, Salomon & Co Ltd for the purpose of taking over and carrying on his business. 

The seven subscribers to the memorandum were Salomon, his wife his daughter and his four son and they remained the only member of the company.

Salomon and his two sons make the board of director; the business of Solomon was transferred to the company for £40,000. Mr.

Solomon took his payment by shares and a debenture or debt of £10,000. Mr Salomon owned 20,000 each £1 shares, these debentures certified that the company owned Salomon £10,000 and created charge on company assets. Within one years the company went into liquidation, after paying of the debenture nothing would be left for the unsecured creditors. The unsecured creditor contended that, the company never had independent existence it was in fact Solomon under another name.

He was managing director, the other director is his son and in this way company was fully under the control of Salomon, and the company was mere sham and fraud. But it was held that Salomon & Co Ltd was a real company fulfilling all the legal requirement it must be treated as a company, as an entity consisting of certain corporater, but a distinct and independent corporation.

House of Lords observed

When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate “capable forthwith”, to use the words of the enactment, of exercising all the functions of an incorporated company. The company attains maturity on its birth. There is no period of minority – no interval of incapacity. I cannot understand how a body corporate thus made “capable” by statute can lose its individuality by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not.

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 persons are 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. That is, I think, the declared intention of the enactment. If the view of the learned judge were sound, it would follow that no common law partnership could register as a company limited by shares without remaining subject to unlimited liability. 

Impact of case 

Before Salomon decision in 1897, the courts have often been called upon to apply the principle of separate legal personality.

But there was uncertainty about application of these principles in some cases, the principle was upheld and in some others it was not. For centuries, there was a controversy over the applicability of the doctrine of separate legal entity and further to limit the theory of limited liability which is often metaphorically termed as lifting the corporate veil. After this case Law recognizes a corporation as a separate legal entity. This principle is referred to as the veil of incorporation. Salomon’s case established beyond doubt that in law a registered company is an entity distinct from its members, even if the person hold all the shares in the company.

There is no difference in principle between a company consisting of only two shareholders and a company consisting of two hundred members. In each case the company is a separate legal entity.

Lifting of corporate Veil Doctrine is also derivative from Separate legal personality concept. After Salomon case there are numerous case come into existence. 

In Macaura v. Northern Assurance Co. Ltd.

The House of Lords decided that insurers were not liable under a contract of insurance on property that was insured by the plaintiff and owned by a company in which the plaintiff held all the fully-paid shares. In this case House of Lords also affirm the separate legal personality of the company and The House of Lords held that only the company as the separate legal owner of the property, and not the plaintiff, had the required insurable interest. The plaintiff, being a shareholder, did not have any legal or beneficial interest in that property merely because of his shareholding. 

In Lee v. Lee’s Air Farming the Privy Council held that Lee, as a separate and distinct entity from the company which he controlled, could be an employee of that company so that Lee’s wife could claim workers compensation following her husband’s death. Salomon case put huge impact over Indian law as most of the provisions of Indian Law were taken from the English Law, Salomon’s case used as judicial milestone in Indian company cases. 

The Supreme Court in Tata Engineering Locomotive Co.

Ltd v. State of Bihar & othrs (1964) stated: the corporation in law is equal to a natural person and has a legal entity of its own. The entity of corporation is entirely separate from that of its shareholders; it bears its own names and has seal of its own; its assets are separate and distinct from those of its members; the liability of the members of the shareholders is limited to the capital invested by them; similarly, the creditors of the members have no right to the assets of the corporation. In LIC of India v.

Escorts Ltd (1986), Justice O.Chinnapa Reddy had stressed that the corporate veil should be lifted where the associated companies are inextricably connected as to be in reality, part of one concern. 

Furthermore in State of UP v. Renusagar Power Company, the Supreme court lifted the veil and held that Hindalco, the holding company and its subsidiary, Renusagar company should be treated as one concern and that the Power Plant of Renusagar must be treated as the own source of generation of Hindalco and on that basis, Hindalco would be liable to pay the electric duty. In the Bhopal Gas leak disaster case, the lifting of corporate veil has become so helpful. After the decision in Renusagar case, the doctrine has been considered in several other cases.

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