Salomon v Salomon & Co Ltd

Factual and Procedural Background

The Appellant operated a prosperous boot-manufacturing business as a sole trader. Seeking to provide for family members and to obtain the advantages of limited liability, the Appellant incorporated Company A under the Companies Act 1862. The seven subscribers to the memorandum were the Appellant, the Appellant’s spouse, and five children. The business was sold to Company A for a mixture of fully-paid shares and debentures; existing trade liabilities were discharged from the purchase price.

Within a short period the trade deteriorated, a receiver was appointed on a debenture-holder’s application, and Company A entered liquidation. The liquidator counter-claimed against the Appellant, alleging that Company A was merely the Appellant’s “alias” or nominee and that the Appellant must indemnify the company for its unsecured debts. Judge Vaughan Williams accepted that analysis; the Court of Appeal (three Lords Justices) affirmed, characterising the formation of Company A as a scheme to evade unlimited liability. The Appellant, suing in forma pauperis, brought the present appeal to the House of Lords; Company A cross-appealed seeking rescission of the sale agreement.

Legal Issues Presented

1. Whether Company A was validly incorporated under the Companies Act 1862 despite the Appellant’s majority (or sole beneficial) ownership.
2. Whether, despite incorporation, Company A was merely the Appellant’s agent or trustee such that the Appellant must indemnify it against its debts.
3. Whether the sale of the business and the issue of debentures to the Appellant should be set aside for fraud or overvaluation.

Arguments of the Parties

Appellant's Arguments

• The statutory requirements for incorporation (seven subscribers, each holding at least one share) were strictly complied with; therefore Company A possesses an independent legal personality.
• The Companies Act does not inquire into the motive for incorporation nor prescribe any minimum beneficial interest for each shareholder; one share suffices.
• No agency or trust relationship arose; if Company A exists as a corporation, the business and liabilities are its own.
• No fraud occurred: every shareholder knew the terms; unsecured creditors could have examined the public documents yet elected to contract with a limited-liability entity.
• The debentures were validly issued under the articles and statutory provisions; creditors were not prejudiced unlawfully.

Respondent's (Company A's) Arguments

• The incorporation and related transactions constituted a scheme to enable the Appellant to trade with limited liability contrary to the “true intent and meaning” of the Companies Act.
• Company A was the Appellant’s nominee, agent, or “alias”; therefore the Appellant should indemnify it for the debts incurred.
• The purchase price for the business was exorbitant, the board lacked independence, and the issuance of debentures gave the Appellant an improper preference—amounting to fraud warranting rescission.

Table of Precedents Cited

Court's Reasoning and Analysis

1. Separate Corporate Personality. All five Law Lords agreed that once the statutory requirements are met—seven subscribers each holding at least one share—the resulting company is “capable forthwith” of exercising all corporate functions. Courts have no licence to insert extra conditions (e.g., independent beneficial ownership) into the Act.

2. Irrelevance of Motive or Family Control. The statute is silent on shareholders’ motives or relationship. Whether six members hold shares in trust for the seventh, or whether all are family members, does not affect the legal existence of the corporation.

3. No Agency or Trust. Calling Company A a “myth,” “alias,” or “agent” contradicts its recognised corporate existence. If the company exists, the assets and liabilities are its own; if it does not, there would be no entity capable of acting as agent. The lower courts erred by oscillating between these inconsistent positions.

4. Absence of Fraud. Assuming—without deciding—that the purchase price was high, every shareholder had full knowledge. A company cannot be defrauded when all its members assent. Creditors had statutory means (public filings) to discover share structure and debenture charges; their failure to inspect cannot convert a lawful transaction into fraud.

5. Debentures and Preference. The articles empowered directors to issue debentures up to £10,000. Such security is permissible and does not, by itself, evidence fraud or illegality. The preference obtained by the Appellant as debenture-holder was a lawful incident of the corporate structure.

6. Resultant Liability. Because Company A is a distinct person, the Appellant, as shareholder and debenture-holder, bears only the statutory limited liability. No equitable indemnity arises.

Holding and Implications

Decision: The House of Lords REVERSED the Court of Appeal. Company A was validly incorporated; the Appellant is not liable to indemnify it, and the cross-appeal seeking rescission is dismissed. Costs were awarded in accordance with the Appellant’s pauper status.

Implications: The judgment definitively establishes the principle of separate corporate personality in United Kingdom law. Once incorporated, a company enjoys rights and bears liabilities distinct from its shareholders, irrespective of single-owner control or family shareholding. Motive, ownership concentration, and internal arrangements are legally irrelevant provided statutory formalities are met. This case therefore provides the foundational authority for limited liability companies and underpins modern corporate practice.