Solomon vs Solomon case

2. Usman Ali

3.  Background
 Forms of Business
 What Is Company?
 Company As Separate Legal Entity
 Conclusion

4.  The idea of separate legal entity was originated
from the case named as Salmon Vs Salmon.
 The facts in this case disclosed that a company
had been incorporated by Mr. Salomon in which
he and members of his family were the only
shareholders.
 The issue arises when the company’s business
turns to be a failure.
 The value of the assets was insufficient to pay
out both Mr. Salomon and the company’s other
creditors.

5.  At that time the statement of affairs’ was like
this:
Assets : $ 6000
Liabilities:
Saloman as debenture holder $ 10,000
Unsecured creditors $ 7,000
 The unsecured creditors claimed a priority
over the debenture holder on the ground that
company and Saloman were one and the same
person and the company was a mere agent in
the eyes of law.

6.  The House of Lords held that the existence of
a company is quite independent and distinct
from its members and that the assets of the
company must be utilized in payment of the
debentures first in priority to unsecured
creditors.

7.  The three main forms of business are
◦ Sole trader
◦ Partnership
◦ Company
 A major disadvantage for sole traders and
partners is that they have unlimited liability
for the debts of their business.

8.  Facts
 Mr Aron Salomon made leather boots and shoes in a
large Whitechapel High Street establishment. His sons
wanted to become business partners, so he turned
the business into a limited company.
 Mr Salomon took 20,001 of the company's 20,007
shares. Transfer of the business took place on June 1,
1892. The company also gave Mr. Salomon £10,000
in debentures (i.e., Salomon gave the company a
£10,000 loan, secured by a floating charge over the
assets of the company). On the security of his
debentures, Mr. Salomon received an advance of
£5,000 from Edmund Broderip.
 .

9.  Soon after Mr. Salomon incorporated his business
a decline in boot sales, exacerbated by a series of
strikes which led the Government, Salomon's
main customer, to split its contracts among more
firms to avoid the risk of its few suppliers being
crippled by strikes.
 The company was put into liquidation. Bordered
was repaid his £5,000. This left £1,055 company
assets remaining, of which Salomon claimed
under his retained debentures.

10. High Court:
The judge, Vaughan Williams J. accepted this
argument, ruling that since Mr. Salomon had
created
the company solely to transfer his business to
it, then the company and Salomon were one
unit;
the company was in reality his agent and he as
principal was liable for debts to unsecured
creditors.

11.  The appeal:
The Court of Appeal also ruled against Mr. Salomon,
on the grounds that Mr. Salomon had abused the
privileges of incorporation and limited liability, which
the Legislature had intended only to confer on
"independent bona fide shareholders

12.  The effects of separate legal entity are:
◦ It has perpetual existence, despite changes of its
members and constitution.
◦ It can own property of any kind, and thus buy and
sell property in its own name.
◦ It can be a party to a contract.
◦ It can sue and be sued in its own name.
◦ Limited liability.
◦ Transferability and transmissibility of shares.

13.  Saloman’s case established new boundaries
that in law a registered company is an entity
distinct from its members, even if the person
hold all the shares in the company.
 There is no difference in principle between a
company consisting of only two shareholders
and a company consisting of two hundred
members, In each case the company is a
Separate Legal Entity.