Case which restored the character of Seprate Legal Entity: Saloman v Saloman

SEJAL MAKKAD | AMITY LAW SCHOOL, AMITY UNIVERSITY CHHATTISGARH | 13th May 2020

Saloman V. A Saloman and co. ltd. (1897) AC 22

Facts

Salomon was a running a sole proprietorship firm who was engaged in boot making business. Later on he turned his sole proprietor firm to a Limited Company, named Salomon Ltd. The company purchased the business into over price rate, and his wife and five elder children became the subscribers and two elder son became directors of the company. Out of 20,007 shares Mr. Salomon purchased 20,001 shares of the company at the rate of 1 Euros each. On 1^st June 1892 this transferred took place and also Mr. Salomon purchased the debentures of the Company at 10,000 Euros, and in security of his debentures Mr. Salomon got advance of 5000 Euros from Edmund Broderip. 

Later on the company failed and went into Liquidation and the Salmon’s right to repay the secured debt arose, causing which the unsecured Creditors had left nothing in the company to get paid from the liquidation process, therefore they sued Mr. Salomon and claimed that the Salomon was acting as an agent of the company and he is personally liable to payback all the creditors as if it was running a sole proprietorship firm. 

 Issues

The major issue lied with Mr. Salomon who was held liable by all the creditors when the payment was not payed during the liquidation. This issue was raised because company being a separate legal entity, the major shareholder cannot be held liable for the debts of the company. Hence, the difficulty was whether, no matter the separate legal identity of a corporation, a shareholder/controller might be held responsible for its debt, over and above the capital contribution, so on expose such member to unlimited personal liability.

Judgement 

The Court held that according to the Companies Act 1862 the doctrine of Separate Legal Personality was set out and the company is separate entity then its shareholder, so in default of the operations of the company the shareholders cannot be made personally liable to pay the debts of the creditors. Hence the creditors cannot sue the shareholders to repay their debts.