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TABLEOFCONTENT

No

Content

SummaryofTheCases

34

TheLegalIssues

56

TheCourtDecide

Bibliographies

Pages

SUMMARYOFTHECASE
Salomon was a successful leather merchant who specialized in manufacturing
leather boots. The facts in this casedisclosedthatacompanyhadbeenincorporatedbyMr.
Salomon in which he and members of his family were the only shareholders. The issue
arises when the companys business turns to be a failure. The value of the assets was
insufficient to pay out both Mr. Salomon and the companys other creditors. Consequently,
the creditors raised an issue whereby they argued that Mr. Salomon should not receive the
paymentfromthecompanybecausethedegreeofcontrolheexercisedoverthecompany.
Mr. Saloman, the owner of a very prosperous shoe business, sold his business forthesum
of 30,000 to Saloman and Co. Ltd. which consisted of Saloman himself, his wife, his
daughter and his four sons. The purchase consideration was paid by the company by
allotment of 23,000 shares and 10,000 debentures and the balance in cash to Mr.
Saloman. The debentures carried a floating charge on the assets of the company. One
share of 1 each was subscribed by theremainingsixmembersofhisfamily.Salomanand

his two sons became the directors of this company. Saloman was the managing Director.
Afterashortduration,thecompanywentintoliquidation.
Thusitsassetswererunningshortofitsliabilitiesb$11,000.Theunsecuredcreditors
claimed a priority over the debenture holderonthegroundthatcompanyandSalomanwere
one and the same person and the company was a mere agent in the eyes of law. But the
House of Lords held that the existence of a company is quite independentanddistinctfrom
its members and that the assets of the company must be utilized in payment of the
debentures first in priority to unsecured creditors. The court held that though virtually
Saloman was the holder of all the shares in the company, he was also thesecuredcreditor
andwasentitledtorepaymentinprioritytotheunsecuredcreditors.

It was held by the House of Lords that despite Mr. Salomon having the control over
the company, it was neither his agent nor trustee. This is because, a company was treated
as operating the business in its own right, and as being separate from its controller, i.e. in
this case of Mr. Salomon. Therefore, the charge given by the companytoMr.Salomonwas
valid and he was entitled to be paid his debt even though other creditors of the company
wouldnotbepaidbecausethecompanyhadinsufficientassetstopayallitscreditors.
Salomans case established beyond doubt that in law a registered company is an
entity distinct fromitsmembers,even ifthepersonholdallthesharesinthecompany.There
is no difference in principle between a company consisting of only two shareholders and a
company consisting of two hundredmembers.Ineachcasethecompanyisaseparatelegal
entity.

THELEGALISSUES
The legal issues in Salomon case is when liability ofitsmemberbecomelimitedand
the company of Salomon end up with failed, the members of the company are not liable to
contribute toward payments of its debts to a limited extent. If the company is limited by
shares, the shareholders liability to contribute is measured by the nominal value of the
shares on how much he or she holds. In other words, once heorsheorsomeonewhoheld
the shares previously has paid that nominal value plus he or she agreed when the shares
were issued, he is no longer liable to contribute anything further. However, the companies
may be formed with unlimited liability of members, or members may guarantee a particular

amount. In such cases, liability of the members shall not be limited to the nominal or face
value of their shares and the premium, if any, unpaid there on. In the case of unlimited
liability companies, members shall continue to be liable till the whole amounthasbeenpaid
off.Ifacompanyisunabletopayitsdebts,itscreditorsmaypetitionthecourttowinditup.
Secondly, Salomon Companys is a body corporate with the power incorporated
because its company is a legal entity by itself. Under Companies Act 1965, itstatesthatan
incorporated company is a corporation that has a separate legal entity or artificial legal
person and exists independently. In other words, a company is existed separately from the
members,officers,employeesaswellastheownerofthecompany.
Another than that, Salomons Company maybe suedandbesuedbyotherpartiesin
its own company but not its participants or its officer because that company and Saloman
wereoneandthesamepersonandthecompanywasamereagentintheeyesoflaw.

It can also receive obligations and own property in its own name because when Mr.
Saloman, the owner of a very prosperous shoe business,soldhisbusinessfortheSaloman
and Co. Ltd. which consisted of Saloman himself, his wife, his daughter and his four sons.
The purchase consideration was paid by the company by allotment of shares, debentures
and the balance in cash to Mr. Saloman. The debentures carried a floating charge on the
assets of the company. Each one of the shares was subscribed of the six members of his
familywhichmakeSalomanandhistwosonsbecamethedirectorsofthiscompany

THECOURTDECIDE

HighCourt:

The judge, Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had
created the company solely to transfer his business to it, prima face, the company and
Salomon was one unit the company was in reality his agent and he as principal was liable
fordebtstounsecuredcreditors.

TheAppeal:
The Court of Appeal also ruled against Mr. Salomon, on the grounds that Mr. Salomonhad
abusedtheprivilegesofincorporationandlimitedliability,whichtheLegislaturehadintended
only to confer on "independent bona fideshareholders,whohadamindandwilloftheirown
and were notmerepuppets".Thelordjusticesofappealvariouslydescribedthecompanyas
a myth and a fiction and said that the incorporation of the business by Mr. Salomon had
beenamereschemetoenablehimtocarryonasbeforebutwithlimitedliability.

TheLords:
The House of Lords unanimously overturned this decision, rejecting the arguments from
agencyandfraud.Salomonfollowedtherequiredproceduresto thesetthecompanyshares
and debentures were issued. The House of Lords held that the company has been validly
formedsincetheActmerelyrequired7membersholdingatleastoneshareeach.
It was irrelevant that the bulk of shares were issued to one shareholder. In the Companies
Act 2001, it is possible for one shareholder to set up a company, this is a one man show
whereheishimselftheshareholderandtheshareholder.

BIBLIOGRAPHIES

http://mycompanylaw.blogspot.com/2013/06/caseiiisalomonvsalomoncoltd1897.html

http://www.lawteacher.net/freelawessays/companylaw/salomonvsalomonco

foundationcompanylawessay.php