Salomon v Salomon [1897]

S
decided to convert existing business to limited company.
Thereafter
S held vast majority of shares.
Company
went into liquidation.
Assets
sufficient to pay secured but not unsecured creditors.
Court
of Appeal held whole transaction was contrary to true intent of Companies Act
and company was mere sham.
As
such S liable for trading debts.
House
of Lords unanimously reversed decision.
Companies
Act merely required 7 members holding at least one share each – this satisfied.
Business
belonged to company, not S.
[Decision
changed company law and world of commerce.
Established
legality of one-man company.
Also
made it possible for trader to limit his liability to money he had put into
enterprise.
Also
allowed trader to limit his liability beyond even this, by subscribing for
debentures rather than shares.
Only
justification is that public deal with limited company at their peril.
Though
case has been criticised, since Salomon,
complete separation of company and its members has never been doubted.
Are
cases in which ‘veil of incorporation’ has been lifted, but not many.]