Salomon v A Salomon & Co Ltd [1897] AC 22

Court: House of Lords

Facts: Mr. Salomon incorporated his business and retained most shares, becoming the principal shareholder, sole director, and main creditor. When the company went into liquidation, creditors sought to hold Mr. Salomon personally liable, arguing the company was a sham.

Issue: Does the control exercised by a shareholder over a company affect its status as a separate legal entity, thereby making the shareholder personally liable for the company's debts?

Held: The House of Lords upheld the separate legal personality of the company, ruling that Mr. Salomon was not personally liable for its debts. The court affirmed that the company was a distinct legal entity, independent of its shareholders.

Key Judicial Statement: Lord Halsbury LC emphasized that "the law as it stands does not concern itself with the motives of those who take advantage of its provisions. If a company is validly constituted, it must be treated like any other independent person with its rights and liabilities appropriate to itself."

💡Leveluplaw: A company’s separate legal personality means that shareholders are not personally liable for the company’s debts, regardless of the level of control they exercise.