Salmon V Salomon Case Study

Salomon V A Salomon And Co Ltd [1897] AC 22 Case Summary

Introduction

Separate Legal Personality (SLP) is the basic tenet on which company law is premised. Establishing the foundation of how a company exists and functions, it is perceived as, perhaps, the most profound and steady rule of corporate jurisprudence. Contrastingly, the rule of "SLP" has experienced much turbulence historically, and is one of the most litigated aspects within and across jurisdictions.1 Nonetheless, this principle, established in the epic case of Salomon v Salomon,2 is still much prevalent, and is conventionally celebrated as forming the core of, not only the English company law, but of the universal commercial law regime.

Commonly known as: Salomon v Salomon

FACTS

In other words, the liquidator sought to overlook the separate personality of Salomon Ltd., distinct from its member Salomon, so as to make Salomon personally liable for the company's debt as if he continued to conduct the business as a sole trader.

ISSUE

The case concerned claims of certain unsecured creditors in the liquidation process of Salomon Ltd., a company in which Salomon was the majority shareholder, and accordingly, was sought to be made personally liable for the company's debt. Hence, the issue was whether, regardless of the separate legal identity of a company, a shareholder/controller could be held liable for its debt, over and above the capital contribution, so as to expose such member to unlimited personal liability.

IMPLICATIONS

Commencing with the Salomon case, the rule of SLP has been followed as an uncompromising precedent5 in several subsequent cases like Macaura v Northern Assurance Co.6, Lee v Lee's Air Farming Limited,7 and the Farrar case.8

The legal fiction of corporate veil, thus established, enunciates that a company has a legal personality separate and independent from the identity of its shareholders.9 Hence, any rights, obligations or liabilities of a company are discrete from those of its shareholders, where the latter are responsible only to the extent of their capital contributions, known as "limited liability".10 This corporate fiction was devised to enable groups of individuals to pursue an economic purpose as a single unit, without exposure to risks or liabilities in one's personal capacity.11 Accordingly, a company can own property, execute contracts, raise debt, make investments and assume other rights and obligations, independent of its members.12 Moreover, as companies can then sue and be sued on its own name, it facilitates legal course too.13 Lastly, the most striking consequence of SLP is that a company survives the death of its