Salomon v Salomon & Co Ltd

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Salomon v Salomon & Co Ltd [1896] UKHL 1

Key case about corporate legal personality.

Quorum: Lord MacNaghten, Lord Watson, Lord Davey

Mr Salomon incorporated his shoe manufacturing business into a limited company. He (personally) held almost all shares, and took debentures from company as consideration for transferring his personal business into it. The company failed, and another creditor sued, alleging the sums the company paid to Mr Salomon for the business were too high.

Held: From its incorporation date a limited company becomes a legal person with the rights and duties distinct from those of the members and shareholders. The company was properly incorporated, and it was not for the court to speculate as to the motives for incorporation. Just because nearly all shares were owned by a single person made no difference. A company and those individuals directing its are, in law separate persons. There is a corporate veil between them, though this might be lifted or “pierced” in an extraordinary case.

Lord MacNaghten: “For such a catastrophe as has occurred in this case some would blame the law that allows the creation of a floating charge. But a floating charge is too convenient a form of security to be lightly abolished. I have long thought, and I believe some of your Lordships also think, that the ordinary trade creditors of a trading company ought to have a preferential claim on the assets in liquidation in respect of debts incurred within a certain limited time before the winding-up. But that is not the law at present. Everybody knows that when there is a winding-up debenture-holders generally step in and sweep off everything; and a great scandal it is.”

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