Salomon v A Salomon & Co Ltd (1897) AC 22 – Case Law Analysis

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Case Analysis Salomon v. A Salomon & Co. (1897) AC 22 This is the foundational case and precedence for the doctrine of corporate personality and the judicial guide to lifting the corporate veil.

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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.

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