Facts
Aron Salomon, a leather merchant, incorporated his business as a limited liability company, Salomon & Co. Ltd., under the Companies Act 1862 (UK). He held 20,001 of the company’s 20,007 shares, with the remaining six shares distributed among his family members to meet the legal requirement of seven shareholders. Salomon sold his business to the company for £39,000, receiving £20,000 in shares, £10,000 in debentures (secured debt), and the rest in cash.
The company later faced financial difficulties and went into liquidation. The liquidator argued that the company was a sham and that Salomon should be personally liable for its debts, as he effectively controlled the company.
Issue
The primary issue was whether Salomon & Co. Ltd. was a validly constituted company with a separate legal personality, distinct from Aron Salomon, or whether it was merely an extension of Salomon himself, making him personally liable for the company’s debts.
Decision
The House of Lords unanimously ruled in favor of Salomon. The court held that the company was a separate legal entity, distinct from its shareholders, as long as it was properly incorporated under the Companies Act 1862. The fact that Salomon held nearly all the shares and effectively controlled the company did not negate its separate legal personality. The debentures issued to Salomon were valid, and he was entitled to be treated as a secured creditor, not personally liable for the company’s debts.
Outcome
The decision in Salomon v Salomon & Co. Ltd. established the principle of corporate personality in English law, affirming that a company is a distinct legal entity separate from its shareholders. This case solidified the concept of limited liability, protecting shareholders from personal liability for a company’s debts, provided the company is properly formed and not used for fraudulent purposes. The ruling has had a lasting impact on corporate law, shaping company structures in Australia.
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