Salomon v A Salomon & Co Ltd

Facts

Aron Salomon transferred his sole trader boot and leather business to a newly incorporated company, A Salomon & Co Ltd, in exchange for shares and secured debentures. The company subsequently became insolvent, and the liquidator and unsecured creditors argued that the company was a mere alias or agent for Salomon, seeking to hold him personally liable for the company's debts. The Court of Appeal had found in favour of the creditors, but Salomon appealed to the House of Lords.

Issues

1. Whether a company incorporated under the Companies Act 1862 (UK) is a legal entity distinct from its shareholders, even where one shareholder dominates the company. 2. Whether a subscriber to a memorandum of association who transfers his business to the company and takes debentures in return is personally liable for the company's debts as a principal or agent of the company.

Holding

The House of Lords unanimously held that A Salomon & Co Ltd was a legal entity entirely distinct from Aron Salomon, and that Salomon was not liable for the company's debts; his secured debentures ranked ahead of the unsecured creditors.

Ratio decidendi

A company duly incorporated under the Companies Acts is a separate legal person distinct from its members, regardless of the extent to which one individual owns or controls it; the motives of the incorporators and the identity of interests between a member and the company are irrelevant to that separate legal existence.

Obiter dicta

Their Lordships observed that Parliament, in enacting the Companies Acts, had made no distinction between a company formed by genuine independent parties and one formed predominantly by a single individual, and that it was not for the courts to impose such a distinction by treating the company as an agent or trustee for its dominant shareholder.

Significance

Salomon v A Salomon & Co Ltd established the foundational principle of separate corporate legal personality that underpins Australian company law, affirmed in the Corporations Act 2001 (Cth) context and consistently applied by Australian courts including the High Court as the bedrock rule governing the distinction between a corporation and its members.

Key authorities

• Broderip v Salomon Broderip v Salomon [1895] 2 Ch 323overruled
• In re Baglan Hall Colliery Co In re Baglan Hall Colliery Co (1870) 5 Ch App 346cited
• In re George Newman & Co In re George Newman & Co [1895] 1 Ch 674considered