Ratio Decidendi
A properly incorporated company is a separate legal entity from its shareholders, even where one person effectively controls the company and is its principal shareholder. The company's debts are not the debts of its shareholders. The corporate veil will not be lifted merely because it is 'just and equitable' to do so or because the company is in substance a one-person operation.
ਤੱਥ
Aron Salomon had been a prosperous leather merchant and boot manufacturer for many years as a sole trader. In 1892, he incorporated his business as 'A Salomon & Co Ltd'. The company was formed with seven shareholders (the statutory minimum at the time): Salomon himself, his wife, his daughter, and four of his sons, each holding one share. Salomon sold his business to the company for £39,000 — a sum substantially above its true market value. As part of the purchase price, the company issued to Salomon: 20,001 shares (each £1), £10,000 in debentures (secured by a floating charge over the company's assets), and the balance in cash. The company subsequently failed and went into liquidation. Its assets were insufficient to pay both Salomon (as secured debenture holder) and the unsecured trade creditors. The liquidator argued that the company was a sham and that Salomon should be personally liable for the company's debts.
ਫੈਸਲੇ ਦਾ ਸਾਰ
The House of Lords unanimously reversed the Court of Appeal and held that the company was a separate legal person, distinct from Salomon. Lord Halsbury LC stated that once a company is legally incorporated it must be treated as a separate entity with its own rights and liabilities. The motives of those who formed it were irrelevant. Lord Macnaghten held that the company was not the agent of Salomon, nor was it a sham — it was a duly constituted company under the Companies Act. The unsecured creditors had no right to look beyond the company to its shareholders. As a secured creditor, Salomon's debentures took priority over the claims of unsecured trade creditors. This case firmly established the principle of separate corporate personality, which remains a cornerstone of company law.
ਮੁੱਖ ਹਵਾਲੇ
"The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them."
— Lord Macnaghten
"Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not."
— Lord Halsbury LC
ਬਾਅਦ ਦਾ ਇਲਾਜ
Consistently followed as the leading authority on separate corporate personality. The principle has been described as a 'fundamental and deeply ingrained doctrine' of company law.
The corporate veil has been pierced in exceptional circumstances: where the company is used as a 'mere façade' to conceal the true facts (Jones v Lipman [1962]), or where it is used to evade or frustrate existing legal obligations (Prest v Petrodel Resources [2013]).
Applied globally — the Salomon principle is recognised in virtually every common law jurisdiction as the foundation of limited liability and separate corporate personality.