What is the Salomon principle?

A company is a separate legal person. Its debts are the company’s debts. Shareholders are not personally liable beyond what they agreed to contribute.

Did motives of forming the company matter?

No. The House of Lords said motives are irrelevant to rights and liabilities once the company is validly incorporated.

Was Mr. Salomon personally liable?

No. He was not personally liable for the company’s debts. The corporate veil was respected in this case.

Why is this case important for students?

It is the foundation of limited liability and separate personality. It affects how businesses raise money and manage risk.

Salomon v. Salomon

Quick Summary

This case fixed a basic rule in company law: a company is its own legal person. Once a company is validly formed, its debts are its own. Shareholders, even a dominant one like Mr. Salomon, are not personally liable beyond what they promised to pay. The House of Lords said motives of forming the company do not change legal rights and duties.

CASE_TITLE: Salomon v. Salomon PRIMARY_KEYWORDS: separate legal personality, corporate veil, limited liability SECONDARY_KEYWORDS: House of Lords 1897, AC 22, shareholder liability, debentures PUBLISH_DATE: 23 Oct 2025 AUTHOR_NAME: Gulzar Hashmi LOCATION: India Slug: salomon-v-salomon

Issues

Can a shareholder be made personally liable for company debts despite separate legal personality?

Do the promoters’ motives affect the legal rights and liabilities after valid incorporation?

Rules

A duly incorporated company is a separate legal person. Its liabilities are its own.
Promoters’ motives are irrelevant to the company’s rights and liabilities once formed.
The “corporate veil” separates the company from its members and controllers.

Facts (Timeline)

Timeline of events in Salomon v. Salomon

Business setup: Mr. Aron Salomon ran a boot business as a sole trader.

Plan to incorporate: He decided to transfer the business to a company with family members as shareholders.

Preliminary terms: Part consideration to be paid in company debentures.

Formation (28 Jul 1892): A. Salomon & Co. Ltd. formed. Wife and five children held one share each; Mr. Salomon held the majority.

Secured creditor: Broderip advanced money; fresh debentures issued at 8% interest.

Default & liquidation: Interest default led to action; the company went into liquidation. Liquidator backed unsecured creditors.

Priority fight: After Broderip was paid, Mr. Salomon claimed repayment as debenture holder before unsecured creditors.

Challenge: Liquidator said the company was a sham and Mr. Salomon should be personally liable.

Arguments

Appellant (Mr. Salomon)

Company was validly incorporated; legal personality must be respected.
As debenture holder, he had priority per law; motives are irrelevant.

Respondent (Liquidator)

Company was a “sham”; family signatories were dummies.
Mr. Salomon should be treated as personally liable to unsecured creditors.

Judgment

The House of Lords reversed the Court of Appeal. The company was a real legal person. Mr. Salomon was not personally liable for company debts. His debentures stood according to law. Motives did not change legal rights once incorporation requirements were met.

Ratio

Separate legal personality is the default rule after valid incorporation. The corporate veil will not be lifted just because one person controls the company or formed it for self-benefit, unless the law clearly requires otherwise.

Why It Matters

Forms the base of limited liability and modern company finance.
Gives certainty: investors know their risk limit.
Guides courts to ignore motives once legal steps are satisfied.

Key Takeaways

Company ≠ shareholders. It is a different legal person.
Promoters’ motives do not affect rights after incorporation.
Corporate veil stands unless statute or fraud justifies lifting.

Mnemonic + 3-Step Hook

Mnemonic: “Seal the Salomon Veil.”

Check valid incorporation.
Treat company as a separate person.
Limit member liability to agreed contribution.

IRAC Outline

	Issue: Can Mr. Salomon be personally liable for the company’s debts?
	Rule: Separate legal personality; motives irrelevant; corporate veil protects members.
	Application: Company formed lawfully; control by one person does not merge identities; debentures valid.
	Conclusion: No personal liability; veil not lifted; House of Lords allowed appeal.

Glossary

Separate Legal Personality: The company is a distinct person in law, not the same as its owners.
Corporate Veil: A protective screen between the company and its members’ personal assets.
Debenture: A loan instrument acknowledging debt, often with security and interest.