Court case[1897] AC 22

Aron Salomon, a leather merchant and boot manufacturer in Whitechapel, sold his prosperous business to a company he had formed under the Companies Act 1862. The seven subscribers required by the Act were Salomon, his wife and their five children, each holding one share; Salomon took 20,001 of the 20,007 shares issued, and the balance of the price was paid to him in debentures of 10,000 pounds secured on the company's assets. The business failed within a year. When the company was wound up its assets could satisfy the secured debentures but nothing was left for the unsecured trade creditors. The liquidator claimed that the company was a mere sham, an agent or nominee of Salomon, and that Salomon should indemnify it. Vaughan Williams J and the Court of Appeal held against Salomon.

The House of Lords unanimously reversed the Court of Appeal. Once a company is registered in compliance with the Act it is a legal person in its own right, with rights and liabilities of its own, and it is not an agent or trustee of its subscribers. The Act does not require the subscribers to be independent or to hold substantial shares; the motives of the promoter are irrelevant if the formalities are complied with. Lord Macnaghten said that the company "is at law a different person altogether from the subscribers" and that "though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them." Salomon was not liable; his secured debentures ranked ahead of the unsecured creditors.