The Concept of Separate Legal Entity by The House of Lords

The principle of Separate Legal Entity is a fundamental principle of Company law. This principle was endorsed in unequivocal terms by The House of Lords in Salomon v Salomon & Co Ltd. (1897) AC 22. It says that a Company registered under the act is an artificial legal entity, separate and distinct from the members of which it is composed. Therefore, it has been established that a company has a separate legal personality. However, this principle gives leverage to corporate groups from escaping their liability.


Aron Salomon, the Appellant, was carrying on the business of boot manufacturing as a sole trader. With the sole intent of transferring his business to a joint-stock company, there was a preliminary agreement settling the condition that part payment was to be made in the form of debentures of the company. A Memorandum of Understanding (MoU) was executed on July 28, 1892, between the Appellant, his wife and his five children as shareholders holding a single share each, and the appellant holding 20,001 shares under his name. After the effect of the MoU, ‘Aron Salomon and Company, Limited’ was established. Edmund Broderip, one of the secured creditors was issued fresh debentures to secure the repayment of his loan with 8% interest. The default is made on the part of the repayment of the interest, Mr. Broderip instituted an action for liquidation of the company. A liquidator was appointed through the order of liquidation at the instance of unsecured creditors of the company. After the payment was made to Mr. Broderip, Salomon claimed that he was entitled to the repayment, before the distribution of the amount to the unsecured creditors. To prevent such an alleged unjust embargo, the liquidator, representing the interests of the unsecured creditors, claimed that the company was a sham and Salomon was the agent of the company and therefore, was personally liable for its debt.


The House of Lords observed that “There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or anyone of them should take a substantial interest in the undertaking, or that they should have a mind and will of their own, as one of the learned Lords Justices seems to think, or that there should be anything like a balance of power in the constitution of the company.” Lord Halsbury opined that, “Once company is legally incorporates it is an independent person with rights and liabilities of its own and these aren’t influenced by the motives of the people involved in its promotion. The company conducts its own business as a separate person.” To establish whether there was a fraud, the sole determination can be done by finding out whether a company was incorporated according to the act. In the present case, the company was constituted as per the act and therefore, the argument of fraud does not stand. And the company stands as a separate legal entity. It opined that it was unacceptable for the jury to interpret the statute limitations based on their personal opinion. The company ideally remained the same even though it was incorporated by the same hands that received the profits, this does not make the company a trustee or an agent of its subscribers and therefore, they are not personally liable for its debt.


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