Area-:
The company is a separate legal entity
Facts-:
Salomon had carried on an enriched business of leather and boot. He formed a limited liability company i.e., Salomon and Co. Ltd. and shareholders of Salomon himself, His wife, His daughter, and his four sons. All shareholders were holding one share each, and the rest of all claims were held by Salomon. He sold his business to the Company for £38,782/- and the Company had issued shares in favour of Salomon as purchase consideration. The purchase consideration was as follows: Shares - £20,000 Debentures - £10,000 And Balance Paid in Cash Salomon was the MD, and two of his sons were other directors of the Company. After one year, the Company ran into financial difficulties, the debenture holders appointed a receiver, and the Company went into liquidation. The assets of the Company were not even sufficient to discharge the secured debentures held by Salomon, and nothing was left for unsecured creditors. The unsecured creditors claimed that the Company was a mere agent for Salomon, and they were entitled to the payment of their unsecured debts in priority to the debenture holders. They also pleaded that Salomon, as a primary beneficiary, was ultimately responsible for all the debts.
Issue:
Whether an individual shareholder of a company can be held liable for the company’s debt and liability?
Judgment:
The House of Lords held that:
(a) The said company comes into existence after its registration under the existing law.
(b) The company had been validly constituted as per the requirement of the existing law like 7 members were required to form a company.
Therefore, the company has its own existence or personality separate and distinct from its members and, as a result, a shareholder cannot be held liable for the acts of a company.
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