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Published: Fri, 02 Feb 2018

The Principle of Salomon

1.Salomon v Salomon & Co Ltd [1897] AC 22 (lawcite link) was the case that got me interested in corporate law. The principle from the case is very simple – a company is a separate legal entity and thus a juristic “person” in the eyes of the law. As with all simple things, the case is complex and has many layers. Aaron Salomon was a Jewish leather merchant in Victorian England. He set up a company with the required seven shareholders (his wife and kids). He lent the company money (as a secured creditor) and then borrowed more money and got into financial trouble. The question of law was who should be paid first, unsecured creditors (like employees and utility bills) or himself as a secured creditor.

The UK Court of Appeal was anti-semetic and felt Salomon was a fraud and his company was a “sham”. But the House of Lords court stated that the company was properly set up, there was no fraud and thus Mr Salomon was a distinct entity from his company, his directorship, his shareholding and his rights as a secured creditor.

This principle has been applied in many, many cases ever since. When I first read the case in 1983 while at Law School in Coventry (UK) I fell in love (if that is the right expression) with corporate law. Many of you know I wanted to be a “lawyer” from about 14 years old, but in 1983 I decided “corporate law” was going to be “my area of expertise” – over 25 years later, it still is! Also, within corporate law, my area of interest has been directors’ duties and securities markets fraud (in particular the confusion over insider trading and market manipulation).

Piercing The Corporate Veil

One of the most uncertain areas in company law today is the situation in which a court is willing to set aside the separate legal personality of a company. Separate legal personality i.e. where a company is regarded by the courts as a legal person with its own rights and responsibilities and that it is capable of owning property amongst other things.   Laffoy J stated in Fyffes Plc v Dcc Plc & Ors ,

“It has been a fundamental principle of Irish company law since the decision of the House of Lords in Salomon v. Salomon and Company Limited [1897] A.C. 22 that a company registered under the Companies Acts is an artificial legal entity separate and distinct from the members, whether natural or corporate persons, of which it is composed.”

In Salomon v. Salomon and Company Limited   as stated by Marc Moore in his recent article,   the House of Lords,

“emphasised that the formally separate personality of a company should prevail in the eyes of the law and, consequently, in the opinion of a court, regardless of any economic or moral considerations that might otherwise justify regarding a registered company as the mere extension of its de facto incorporators.”

The facts of the Salomon case were that Mr. Salomon ran a successful leather business as a sole trader. He then set up a company in which he was the main shareholder. He loaned the company money which he secured with the assets of the company. He observed the tenets of company law at all times. He was also the main shareholder and further to that the main creditor due to the loan. The question in this case was whether Mr. Salomon debts should take precedence over the unsecured creditors when the company was wound up.   If Mr. Salomon won the case, the creditor would receive no money.

In the High Court, Mr. Salomon lost the case and was ordered to pay the debts. This decision was founded in the idea that the company was his nominee or agent.

Mr. Salomon appealed the decision, where he once again lost the…

Salomon Principle


The most important decision ever made by the English courts in Relation to company law is Salomon v A Salomon & Co. Ltd (1897). The vital perception to become familiar with when starting a business is the idea that the business has a legal personality in its own right, mostly when it assumes the form of a Limited Liability Company. This basically means that if someone starts a business as a Limited Liability Company, then the Company is a legal entity with separate legal personality, would be separate to that of the owners, members, or shareholders. As a separate entity, the company is different from the directors, employees and shareholders. The House of Lords in the Salomon case confirmed the legal principle that, upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders. The court did this in relation to what was essentially a one person Company, which is Mr Salomon. At a specific level, however, it was a bad decision. By extending the benefits of incorporation to small private enterprises, Salomon’s case has upheld fraud and the evasion of legal obligations, (this will be looked at into depth later). The main areas this essay will be focus on are; the discussion on the Salomon’s case which will include the corporate veil {whether or not it is a legal fiction}; if the corporate veil is consistently acknowledged, look behind the veil or piecing the corporate veil and the situations of which the government expressed itself on its intention in piecing the veil, including a reasonable conclusion.

The concept that prevail the Salomon’s case is nothing else but a company is separate from the shareholder, which means that the company is independent and separate from any other entities that are related to the company. In Salomon v Salomon and Co Ltd. (1897), Mr Aron Salomon has been operated his business as a sole proprietor for many years, he then decide to…

Case Study on Company as Separate Legal Entity

A corporation is a separate legal entity from its owners. In other words, if a corporation, in the course of doing business, is involved in any legal action, then the corporation, for legal purposes, is its own person. The corporation is liable for its taxes – not the owner. This is how corporations may sue and be sued, and their assets are tracked separately. If a corporation is sued, then the owners will not have their personal belongings at risk unless those belongings were purchased with illegal returns from the corporation.

In a sole proprietorship or partnership, the owners personally liable. For all intents and purposes, all acts taken by these two company types are taken by the owners themselves. The company becomes a legal person in its own right, distinct from the

Shareholders and management:

This was seen in the famous case of Salomon v Salomon & Co Ltd (1897). Separate personality means that the artificial legal person, the company, can do almost everything a human person can do; it can make contracts, employ people, borrow and pay money, sue and be sued, among other things.

The ‘veil of incorporation’ is the rather poetic term given to this separation of the company from its shareholders or members. This separation of a company from its members was established in the House of Lords in the famous case.

Salomon v Salomon & Co Ltd (1897)

Mr. Salomon had a boot manufacturing business which he decided to incorporate into a private limited company. He sold his business to the newly formed company, A Salomon & Co Ltd, and took his payment by shares and a debenture or debt of £10,000. Mr Salomon owned 20,000 £1 shares, and his wife and five children owned one share each. Some years later the company went into liquidation, and Mr Salomon claimed to be entitled to be paid first as a secured debenture holder. The liquidator and the other creditors objected to this, claiming that it was unfair for the person who formed and ran the company to get paid first. However, the House of Lords held that the company was a different legal person from the shareholders, and thus Mr Salomon, as a shareholder and creditor, was totally separate in law from the company A Salomon & Co Ltd. The result was that Mr Salomon was entitled to be repaid the debt as the first secured creditor.

In this case, Mr Salomon was the major shareholder, a director, an employee and a creditor of the company he created. It is quite common in Ireland for one person to have such a variety of roles and still be a different legal entity from the company.

Lee v Lee’s Air Farming Ltd (1961)

In this case, Mr. Lee formed his crop spraying business into a limited company in which he was director, shareholder and employee. When he was killed in a flying accident, his widow sought social welfare compensation from the State, arguing that Mr. Lee was a ‘worker’ under the law. The State argued that Mr. Lee was self-employed and thus not covered by the legislation. The court held that Mr. Lee and the company he had formed were separate entities, and it was possible for Mr. Lee to be employed by Lee’s Air Farming.

The following case is similar to Salomon and Lee, but the principle of separate personality worked to the disadvantage of the plaintiff.

Battle v Irish Art Promotion Centre Ltd (1968)

The defendant company was involved in legal proceedings but did not have enough money for legal representation. The plaintiff, who was the major shareholder and managing director of the company, sought to conduct the company’s defence. The court held that while a human person can represent him or herself in court, a legal person such as a company can only be represented by a solicitor or barrister.

The principle in Salomon’s Case that a company is a legally different person from those who control it represents the current law in Ireland. For example, if I form a company called ‘Murphy & Co Ltd’ in which I own one hundred per cent of the shares and am a director and employee, legally speaking the company and myself are two distinct people. The ‘corporate veil’ surrounds the company of Murphy & Co Ltd and prevents outsiders challenging the operation of the company. However, although the principle of separation is central to company law, there are a number of situations when the company and its members can be identified together and treated as the same. These are the exceptions to the rule in Salomon’s Case, when the corporate veil is lifted and the reality of the situation is examined.

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