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Salomon v A Salomon and Co Ltd  AC 22 Case SummaryFactsMr Salomon was a shoemaker in England. His sons wanted to become his business partners so he converted his business intoa limited company (A Salomon & Co Ltd).A Salomon & Co Ltd purchased Mr Salomon’s business for above market value.His wife and his five children became subscribers. The two eldest sons became directors of the company.Mr Salomon was allocated 20,001 of the company’s 20,007 shares.The company gave Mr Salomon £10,000 in debentures and received an advance of £5,000 from Edmund Broderip, on securityof the debentures.Salomon’s business eventually failed and it defaulted on its interest payments on the debentures (half held by Broderip).Broderip sued to enforce his security.The company went into liquidation. Broderip was repaid his £5,000. This left £1,055 company assets remaining. Salomonclaimed this amount under his retained debentures. This would leave nothing for unsecured creditors.The company’s liquidator argued that Salomon should be responsible for the company’s debts. Salomon sued for the£1,055.IssueWas the formation of A Salomon & Co Ltd a fraud intended to defeat creditors?HeldAfter several sets of proceedings in lower courts, the appeal landed in the House of Lords.
The Companies Act 1862(UK) did not require shareholders to be independent of the majority shareholder.A Salomon & Co Ltd was legally constituted and it was not the role of judges to read limitations into the statute in a mannerthat they considered preferable.Quotes“Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon… If it wasnot, there was no person and no thing to be an agent at all; and it is impossible to say at the same time that there is a company andthere is not.”AbstractThe doctrine of separate legal entity is a doctrine which has gained increasing importance in the analysis of company law. Theimportance of this doctrine and its relevance in the analysis of laws relating to companies is evident in the case of Salomon v ASalomon and Co Ltd  AC22, the leading case which gave effect to the separate entity principle (Macintyre 2012).This case has formed the basis of company law and corporate theory. Not only is this case often quoted in textbooks and journalarticles, but also, its principles have found their way to English courtrooms and law firms (Karasz 2012)Aligning with the above, this paper explains the following statement made by Lord Halsbury in Salomon’s case“Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. C Salomon. If it wasnot, there was no person and nothing to be an agent at all; and it is impossible to say at the same time that there is a company and thereis not” (Roach 2012).
Attempts will be made in this paper to analyze courts’ approach to the separate entity principle. Criticism against the decision made bythe House of Lords in salomon’s case will also be examined.