SOLOMON Vs SOLOMON Vs SOLOMON & CO.LTD.SOLOMON & CO.LTD.

(1897)A.C.22(1897)A.C.22

04/10/23 01:10 1Ghanshyam IILM Gurgaon

INTrODUCTIONINTrODUCTIONMr Aron Salomon was a leather boot and Mr Aron Salomon was a leather boot and

shoe manufacturer. He had a wife, a shoe manufacturer. He had a wife, a daughter and five sons.daughter and five sons.

Converted his business into a limited co.Converted his business into a limited co.

Company purchased the business of Company purchased the business of Solomon at 40000 poundSolomon at 40000 pound

Purchase consideration was in terms of Purchase consideration was in terms of 10000 debenture, 20000 equity share 10000 debenture, 20000 equity share and 10000 was in cashand 10000 was in cash

04/10/23 01:10 2Ghanshyam IILM Gurgaon

Mr Salomon took 20,001 of the company's Mr Salomon took 20,001 of the company's 20,007 shares. And his wife and all the 20,007 shares. And his wife and all the son and a daughter took one share son and a daughter took one share each .each .

The wife and five eldest children became The wife and five eldest children became subscribers and two eldest sons also subscribers and two eldest sons also directors.directors.

04/10/23 01:10 3Ghanshyam IILM Gurgaon

Liquidation of Solomon Co.Liquidation of Solomon Co.

The business of the company wind up in the The business of the company wind up in the depression and the company went into depression and the company went into liquidation after a year.liquidation after a year.

The assets of the company is not sufficient.The assets of the company is not sufficient.

Nothing was left for unsecured creditorsNothing was left for unsecured creditors

The unsecured creditors sued Salomon and The unsecured creditors sued Salomon and they contended that Salomon & Co. Ltd they contended that Salomon & Co. Ltd was a fraud and contrary to the meaning was a fraud and contrary to the meaning and intent of the Companies Law.and intent of the Companies Law.

04/10/23 01:10 4Ghanshyam IILM Gurgaon

Separate legal entity Separate legal entity

1.A separate legal entity refers to a 1.A separate legal entity refers to a legal entity with accountability.legal entity with accountability.

2.SLE legally separate business from 2.SLE legally separate business from individual or owner individual or owner

Like limited liability company or a Like limited liability company or a corporation corporation

04/10/23 01:10 5Ghanshyam IILM Gurgaon

Contd….Contd….It is a better form of existence for the It is a better form of existence for the

reason it takes its responsibilities reason it takes its responsibilities itself, owners are free from their itself, owners are free from their personal liabilities and owners enjoy personal liabilities and owners enjoy limited personal liability (risk) only up limited personal liability (risk) only up to their investments in stocks, though to their investments in stocks, though there may be certain situations where there may be certain situations where their personal responsibilities can their personal responsibilities can exceed from limited liability concept.exceed from limited liability concept.

04/10/23 01:10 6Ghanshyam IILM Gurgaon

The House of Lords did not find any The House of Lords did not find any form of fraud or deliberate abuse of form of fraud or deliberate abuse of the corporate form, on the contrary the corporate form, on the contrary Salomon was a victim in that he did Salomon was a victim in that he did his best to rescue his company by his best to rescue his company by cancelling the debenture he took and cancelling the debenture he took and raising them to an outside creditor raising them to an outside creditor who provided fresh loan capital. who provided fresh loan capital.

JudgmentJudgment

04/10/23 01:10 7Ghanshyam IILM Gurgaon

This honesty and good faith on the part of Salomon This honesty and good faith on the part of Salomon prevented him from indemnifying the company prevented him from indemnifying the company creditors. The Houseof Lords found there is a legal creditors. The Houseof Lords found there is a legal entity properly formed and there was no use of entity properly formed and there was no use of liftingthe veil between Salomon and his company. liftingthe veil between Salomon and his company. the business belonged to it and not to Mr Salomon.”the business belonged to it and not to Mr Salomon.”

As a result of the Court of Appeal refusal to As a result of the Court of Appeal refusal to recognise the existence of the legal entityrecognise the existence of the legal entity

and regarding the company instead as a myth and and regarding the company instead as a myth and fiction, they thought that thefiction, they thought that the

business belonged to Aron Salomon.business belonged to Aron Salomon.

04/10/23 01:10 8Ghanshyam IILM Gurgaon

Conclusion Conclusion The House of Lords found that honesty and The House of Lords found that honesty and

good faith on Salomon’s part prevented him good faith on Salomon’s part prevented him from indemnifying the company creditors as from indemnifying the company creditors as they knew they were dealing with a legal they knew they were dealing with a legal person totally different from his person totally different from his incorporators. Limited liability at that time incorporators. Limited liability at that time was also available to sole traders and large was also available to sole traders and large investors who wanted some form of limit on investors who wanted some form of limit on their undertakings.their undertakings.

04/10/23 01:10 9Ghanshyam IILM Gurgaon

04/10/23 01:10 10Ghanshyam IILM Gurgaon