Introduction

• This case deals with lifting of the corporate veil under the company law.
  • The "lifting of the corporate veil" refers to a legal concept where a court disregards the separate legal personality of a corporation, exposing the individuals behind the company to personal liability for its actions.
• In this case, the question was raised whether the company and the holder were different or personally liable for the losses of the company.

Facts

• Before the incorporation of the company involved in this case, Mr. Salomon operated a successful leather business as a sole trader.
• In 1892, Mr. Salomon decided to convert his business into a private limited company, Salomon & Co. Ltd., under the Companies Act, 1862. The company had a nominal share capital of £40,000, divided into 20,000 shares of £1 each.
• Mr. Salomon subscribed for 20,001 shares - 20,000 for himself and one for each of his family members, including his wife, daughter, and four sons. This share distribution was a strategic move to comply with the legal requirement of having at least seven shareholders in a company.
• As part of the company's formation, Salomon provided a loan of £10,000 to the company and took debentures (a form of secured loan) as a security interest.
• In consideration for the transfer of his business to the company, Salomon received 20,000 fully paid-up shares, and the remaining 1,000 shares were distributed to his family members. Salomon also received a debenture for £10,000.
• Despite the apparent distribution of shares, Salomon retained control of the company. He was the managing director, and the other family members played a passive role in the business.
• The company faced financial difficulties, partly due to a downturn in the economy. It encountered difficulties in repaying the debentures held by Mr. Salomon.
• Eventually, the company went into liquidation. The liquidator sought to treat the company as a mere face and insisted that the corporate veil be lifted, making Mr. Salomon personally liable for the company's debts.

Issues Involved

• Whether Salomon & Co. Ltd was a company or not?
• Whether Salomon was personally liable for the debts of the company?

Observations

• The House of Lords, in its judgment, emphasized the importance of the corporate entity. It unanimously held that the company was a separate legal entity with its own rights and liabilities.
• The court upheld the validity of the company's incorporation, stressing that once the requirements for incorporation were met, the company became a distinct legal entity.
• The limited liability of shareholders was affirmed. The court held that the shareholders' liability was limited to the nominal value of their shares, and Mr. Salomon, as the majority shareholder, was not personally liable for the company's debts beyond the amount unpaid on his shares.
• The judgment underscored the importance of respecting the corporate form and not lightly disregarding the separate legal personality of a company, even in cases where the shareholders were closely related.

Conclusion

• The House of lords finally held that the business belonged to the company but not to Salomon and he was not liable to indemnify the company for its debts.