SUMMARY OF THE CASE OF SALOMON VS SALOMON

Aron Salomon had business manufacturing footwear and he owned a number of

warehouses in London. In 1892 Aron Salomon set about restructuring his business
which he had run for a number of years as a sole trader. His principle motivation was
that his sons wanted to participate in the business.

He decided to convert the business into limited company. Aron Salomon and
Company, Limited was formed with liability limited by shares. Memorandum of
company was subscribed by Aron Salomon, his wife and his five children.

The business purchased by the new company is for 39,000 which 20,000 paid to
Aron Salomon and then he returned it to company as exchange for fully paid shares.
10,000 was paid in debentures. The balance of 1,000 which Aron Salomon received
and retained went in discharge of debts and liabilities of the business at time of
purchase. So as result Aron Salomon received from the purchase is about 1,000 and
10,000 in debentures.

In 1893 the company become insolvent and went into liquidation. The company set
out by way of counter claim, inter alia that the company was a mere nominee and
agent of Aron Salomon and that the company or liquidator was entitled to be
indemnified by Aron Salomon against all the debts owing by the company to creditors
other than Aron Salomon himself. Issue occur in this case was either the debenture
originally issued to Aron Salomon was valid and therefore ranked in priority to
unsecured creditors.

The High court, and the Court of Appeal ordered that Salomon should pay the
creditors personally saying that the pretended sale to the company was an utter
fiction

The Court of Appeal was overturned by the House of Lords who pointed out;

The company is at law a different person altogether from the subscribers to the
memorandum; and, though 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 and in the manner provided by the Act.
That is, I think, the declared intention of the Act.

Although Mr Salomon was a director and shareholder of the company that did not
make him liable for the companys debts.

Further because he was also a secured creditor of the company he was entitled,
similarly to any other secured creditor, to be repaid his debt in priority to unsecured
creditors.

The principle in Salomon is known as the veil of incorporation. The law will not go
behind the separate personality of the company to get at members except in some
exceptional circumstance that we will talk about later.

The sole trader can limit his liability to the amount which he has invested in the
company and can protect this investment by subscribing for secured debentures, rather
than shares, so as to rank in priority to subsequent debenture holders, unsecured
creditors and other shareholders.

CHRONOLOGY OF THE CASE

1892

1893

HIGH COURT
AND COURT OF
APPEAL
JURISDICTION

HOUSE OF
LORDS
OVERTURNED
THE DECISION

CHANGE COMPANY TO LIMITED COMPANY

BUSINESS PURCHASED FOR 39,000 THEN 20,00 PAID TO ARON
SALOMON WHICH HE RETURNED BACK TO COMPANY AS EXCHANGE
FOR FULLY PAID SHARES AND 10,000 PAID IN DEBENTURE
ARON SALOMON RECEIVED 1,000 AND WENT IN DISCHARGED OF
DEBTS AND LIABILITIES AND 10,000 IN DEBENTURES

COMPANY BECOME INSOLVENT AND WENT INTO LIQUIDATION

COMPNY SET OUT BY WAY OF COUNTER CLAIM, INTER ALIA WHICH THAT
THE COMPANY WAS A MERE NOMINEE AND AGENT OF ARON SALOMON AND
THAT THE COMPANY OR LIQUIDATOR WAS ENTITLED TO BE IDEMNIFIED BY
ARON SALOMON AGAINST ALL THE DEBTS OWING BY THE COMPANY TO
THE CREDITORS OTHER THAN ARON SALOMON HIMSELF
ISSUES OCCUR EITHER THE DEBENTURE ORIGINALLY ISSUED TO ARON
SALOMON WAS VALID AND THEREFORE RANKED IN PRIORITY TO
UNSECURED CREDITORS

ORDERED ARON SALOMON SHOULD PAY THE CREDITORS PERSONALLY

REASON WAS THAT THE PRETENDED SALE TO THE COMPANY WAS AN
UTTER FICTION

THE HOUSE OF LORDS DID NOT FIND ANY FORM OF FRAUD OR DELIBERATE
ABUSE OF THE CORPORATE FORM
ARON SALOMON WAS A VICTIM IN THAT CASE WHICH HE DID HIS BEST TO
RESCURE HIS COMPANY BY CANCELLING THE DEBENTURE HE TOOK AND
RAISNG THEM TO AN OUTSIDE CREDITOR WHO PROVIDED FRESH LOAN
CAPITAL

BUSINESS LAW ASSIGNMENT

SEMESTER II
SESSION 2014/2015
CASE STUDY OF SALOMON VS SALOMON

SUBJECT NAME

BUSINESS LAW

SUBJECT CODE

BPB 22903

COURSE

3 BPA

NAME

:MOHAMAD AKMAL HAKIM BIN

SUFIAN

MATRIC NO

: CP120063

SECTION

:2

LECTURER

:EN MOHD NAZIR BIN MOHD ALI