ABSTRACT
Salomon v. A Salomon & Co. Ltd. case is a cornerstone in company law, establishing the separate legal entity principle which asserts that a company is a legal person distinct from its shareholders and directors. The liability of directors and stockholders was called into question by this landmark case, particularly in relation to the debts owing to unsecured creditors. Although limited liability was established in this case, some contend that it violated basic utilitarian ethics by favoring the interests of the company’s shareholders above its unsecured creditors. This case also emphasizes the necessity of corporate governance concepts, such as Enlightened Shareholder Value and micro-managerialism, in protecting larger stakeholder interests. However, this study seeks to explore the ideas and ethical theories that support corporate governance, with an emphasis on the consequences of shareholder accountability and the Corporate Veil as established in the case of Salomon v. A Salomon & Co. Ltd.
Keywords: separate legal entity, unsecured creditors, limited liability
- Introduction
A company is a different legal entity from its members, therefore it is legally distinct from its shareholders, directors, promoters, and so on, and as such, it has rights as well as some responsibilities and obligations.[1] The case Salomon v. A Salomon & Co. Ltd.[2] is considered one of the landmark case laws in company law since the principle of separate legal entity was first laid down through this case. This case formed one of the most significant instances for the stringent application of the separate corporate responsibility theory. This approach applies even if it is evident that the company was really a sole proprietorship with only one person. The shareholders of Salomon & Co. were Salomon himself, his wife, daughter and four sons which was a limited company and Salomon had a major portion of the shares of the company and debentures for £ 1000.[3] When the company collapsed into liquidation within a year, it was discovered that nothing remained for unsecured creditors after paying the debenture holders and so unsecured creditors filed a lawsuit, contending that there is no distinction between Salomon and Salomon & Co. and Salomon is obligated to pay the company’s unsecured creditors out of his own pocket.[4] However, the issue was whether, despite a company’s independent legal entity, a shareholder may be made personally accountable for its debt in excess of the capital contribution, exposing such member to infinite personal culpability. In other words, whether an individual shareholder of a company may be held accountable for the debts and liabilities of the company or not. There was also another issue which was whether secured creditors and shareholders are the same or not. The House of Lords, in the case of Salomon v. A Salomon & Co. Ltd, ruled that once a company is properly constituted, it becomes an independent legal entity from its shareholders. As a result, the company is responsible for its own obligations, and owners, including the founder, cannot be held personally accountable for more than the value of their shares. The court highlighted that as long as the formal incorporation criteria are completed, even if one shareholder owns the majority of the company, it remains a separate entity. This established the “Corporate Veil,” which protected shareholders from personal accountability and solidified the notion of limited liability in company law.
[1] All Answers ltd, ‘Separate Legal Entity of a Company’ (LawTeacher, 20 September 2021) <https://www.lawteacher.net/free-law-essays/business-law/separate-legal-entity-as-distinct-from-its-members-business-law-essay.php> accessed 1 November 2024
[2] Salomon v A Salomon & Co Ltd [1896] UKHL 1 AC 22
[3] AI Khan, Fundamentals of Company Law With Partnership Law (2nd edn, University Publications 2020) 11
[4] ibid.