Separate Legal Personality
The Rule in Salomon v Salomon & Company Limited (1897) A.C.22
- Company which is registered according to the Companies Acts 1963-2012 has a distinct legal personality.
- In Limited Liability companies shareholders are not liable for the debts of the company to its creditors ( only have to pay the remaining unpaid shares that were issued to him according to to the terms of the articles and memorandum of association)
Facts of the case
- Mr Salomon was a sole trader who owned a boot manufacturing and leather business. His sons worked in the business and pressed him to give them a stake. Mr Salomon incorporated a newly formed limited company.The company purchased Salomon’s business for £39,000. His wife and five eldest children became subscribers and two eldest sons also directors.
- The consideration was made up of 20,000 fully paid shares of £1, a cash payment of approx. £9,000, a loan from Mr Salomon to the company of £10,000 secured by floating charge.
- The company went into liquidation.
- The question was whether Mr Salomon’s secured debt of £10,000 should be paid by the company in priority to debts amounting to £7,500 owning to company’s unsecured creditors.
- Liquidators argued that unsecured creditors should have priority over the debenture issued to Mr Salomon. Liquidators said that the incorporation of business by Mr Salomon was a mere scheme to enable him to carry on business in the name of the company with limited liability, contrary to the true intent and meaning of Companies Act.
- However, House of Lords held that the creditors had to respect the principles of incorporation and that the company could not be treated as an agent of the controller. The company was separate and distinct from those within it and legally had to be treated separately.
- Lord McNaghten- ” The company is at law a different person altogether from the subscribers to the Memorandum; and, although 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 a trustee for them. Nor are the subscribers, as members, liable in any shape or form, except to the extent provided by the Act.”
Application of the principle
Quigley Meats Ltd v Hurley (2011) IEHC 192
- The Plaintiff (Quigley’s) supplied Hurley’s with meat produce for their bar and restaurant called ” An Seanachie Bar”.
- The plaintiff were of the impression that they were dealing with the defendant personally. However, payments for the produce were always made to Quigley Meats Ltd from a company account ” The Seanachie Cottages Ltd”.
- Defendants got into financial difficulty and stopped paying the plaintiff for the produce.
- Quigley Meats Ltd took legal action against Hurley for unpaid bills.
- The court initially found for the Quigley’s ordering the defendants to pay the debt of €26,719.
- The defendants appealed arguing that they could not be found personally liable as the debt was for their company to pay.
- High Court agreed with the defendants on the grounds that when they did pay the Quigleys they had paid with cheques which had the company’s name printed on them. Therefore they ought to have known that they were dealing with a limited liability company and not individuals.
Lee v Lee’s Air Farming Ltd (1961) AC 12
- The fact that the deceased could control the company “did not alter the fact that the company and he were 2 separate distinct persons”
Macura v Northern Assurance (1925) AC 619
- Damage to a company’s property was not recoverable under an insurance policy because the policy was in the name of the company’s controller and not that of the company.
- The company owned the property.
Irish Law Notes 