Question

Provide a case summary of the case “Salomon v Salomon & Co Ltd [1897]” using the IRAC method. What was the significance of this case law in relation to the legal concept of separate legal entity?

Can you use Harvard referencing. thank you very much

Answer 1

A separate legal entity is a person recognised by law - a "legal person". The entity has its own legal rights and obligations, separate to those running and/or owning the entity.

That person could be a company, limited liability partnership, or any other entity recognised by law as having its own separate legal existence.

An “incorporated” entity - such as a company - is a separate legal entity. That’s a separate legal existence to its:

1. founders: the natural persons that caused it to be formed
2. directors: those that control the company
3. shareholders: those that own the company.

The hallmarks of a separate legal entity are that it can:

• buy, sell and own property of any kind in its own name
• agree to legally binding contracts, and
• sue and be sued in its own name.

As a consequence of these features, separate legal entities can:

• incur debt (which is created by a contractual relationship)
• become creditors, by lending to others
• own assets - ie property:
  • tangible: desks, chairs, pens and paper
  • intangible: such as intellectual property rights: copyright, designs, trade marks and confidential information
• own real property, ie land, and
• be liable to pay taxes (a statutory obligation)

All the things that human beings can do (and are legal entities), from a legal perspective.

This terms “separate legal entity” means the same thing as “separate legal personality”, “separate legal existence”, and “separate legal person”. It’s an entity with the features described in bold above and recognised by law as having those features.

What isn't a separate entity?

Although it may seem like it, a separate legal entity is not:

1. a trade mark: a trade marks are personal property owned by a legal entity, whether it's an individual, a company or other form of legal entity
2. a domain name: a domain name is registered in the name of a legal entity. The legal entity is entitled to use it does not own it. The legal entity rents it from the relevant domain name registrar.
3. a brand or trading name: these are in essence aliases for a legal entity. Like trade marks, the only true reference to a company for instance includes the use of the suffix with the company name.
4. a group of companies: each company within the group is a legal entity. Just because there is a collection of companies with subsidiaries and parent companies does not mean that they have one single legal existence. They are all separate legal persons.

Origin of Separate Legal Entities

This separate legal personality concept was first recognised by courts in case law in the famous case named Salomon v A Salomon & Co Ltd, decided in 1897.

In that case the House of Lords decided:

Once a company is incorporated, it has a separate legal existence to the shareholders of the company…

[the company] must be treated like any other independent person with its rights and liabilities appropriate to itself …, whatever may have been the ideas or schemes of those who brought it into existence.

What happened in Salomon v A Salomon and Co Ltd?

The facts of the case are more complicated than we’d like for example purposes.

Stripping back a lot of the detail (and glossing over a lot of it), this is what happened in Salomon v A Salomon:

. Aron Salomon ran a leather and boot-making business in his own name.

. He incorporated a business for his leather and boot-making business. He named it “A. Salomon and Co Ltd”.

. So, he incorporated a previous business and contracted through the defendant company rather than in his own name.

. When he incorporated the company, Mr Salomon took a series of security interests (essentially mortgages) over the assets of the company.

. Business in the boot trade declined, and the company went into liquidation.

. Salomon and Co Ltd defaulted on payment of the securities. Mr Salomon was sued by the liquidator (in the name of the company), claiming that Mr Salomon was liable for the debt.

. The company was a separate person from Mr Salomon. Mr Salomon could not be made personally liable for the debts of the company.

As a result, the company was liable on the contract sued on, and not the shareholders or directors.

That’s the essence of a company’s own separate legal existence.

The directors aren’t the company. Nor are the shareholders. Nor are the employees.