Let’s call this; Learning The Law Series. Under this series, we would be pinpointing and expounding on some of the foundations upon which some famous legal principles were founded and built. This journey would take us to analyzing and explaining some old English cases where the court birthed those principles.
Today, we would be taking a look at the Salomon principle, the locus classicus for the principle of separate legal entity.
This old English case of 1897 founded the legal principle which postulates that a company is essentially regarded as a legal person separate from its directors, shareholders, employees and agents.
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The purport of this legal principle is that you cannot hold one legal person responsible for the debt or sins of another legal person. An incorporated company is regarded as a legal person (although juristic, it is still a legal person).
Truth be told that this case was not the case that established this principle of an incorporated business having a separate legal personality from its owners; this legal principle has been in existence long before this case but it was through this case that the court expounded its reach and meaning and gave it a judicial notation hence why it’s it claimed that it was this case that birthed this principle.
Some sub-principles that this case birthed are; that owners, employees or agents of an incorporated business cannot be prosecuted or be sued for actions of the company or act of theirs which they committed while in their official capacity either acting as a director, an agent or an employee of the company. If the company authorized them to carry out that action or the company ratified that action of theirs then it is the company that must be held liable and not them. Secondly, a company being a distinct legal person can be, will be and should be treated as such; it can enter into a legal and binding contract, and it can sue and be sued. Thirdly, incorporation can act or serve as a long-standing shield to the owners of a business and save them from liabilities, both criminal and civil liabilities, this shield is known as the veil of incorporation. Finally, the court cannot question the validity of incorporation through registration where all the formalities have been complied with.
Here is the summary of this famous Salomon V Salomon case;
Mr Aaron Salomon was a sole proprietorship. He was into the business of bootmaking. In 1892 he decided to turn his sole proprietorship business into a company by incorporating it; he, therefore, incorporated Salomon & Co Ltd. He and his family members; his wife and five children became a shareholder in the company, making him and two of his sons the directors of the company. After the incorporation, Mr Aaron Salomon sold the boot-making business to Salomon & Co Ltd.
Not too long after the incorporation, the company became insolvent and entered into liquidation. As a shareholder and as a secured creditor of the company, Mr Aaron Salomon claimed that he is entitled to £1055 which is to take priority over other creditors with unsecured credit in the company.
The appointed company liquidator, Mr Brodrip, resisted this move of Mr Aaron Salomon. The liquidator posited that Salomon should be responsible for satisfying the Company’s debts just as he would if he had remained a sole trader.
They took the matter to court. At the court of first instance (Brodrip V Salomon), the court held that the company had conducted business as an agent for Mr Salomon, making Mr Salomon himself the principal. Therefore, the court held Salomon to be personally liable to indemnify the creditors for all the debts incurred in the course of agency for him. Salomon appealed but the court of appeal upheld the court of first instance’s decision.
The matter was subsequently brought before the House of Lords and the House of Lords took a detour from the previous decisions of the lower courts.
The House of Lords unanimously decided that the company had been validly brought into existence through incorporation and once a company has been validly registered, the business of the company belongs to the company and not to the shareholders, directors or employees. The House of Lords affirmed that the extent of the consequences flowing from valid incorporation confirms that a company is a separate legal entity different and distinct from its owner, therefore, Mr Aaron Salomon was not liable for the debts and liabilities incurred by the company.
Salomon v A Salomon & Co Ltd (1897) AC 22