Salomon v Salomon
| Salomon v A Salomon & Co Ltd | |
|---|---|
|
|
| Court | House of Lords |
| Decided | 16 November 1896 |
| Citation(s) | [1896] UKHL 1 [1897] AC 22 |
| Case history | |
| Prior action(s) | Broderip v Salomon [1895] 2 Ch. 323 |
| Case opinions | |
| Lord Macnaghten, Lord Halsbury and Lord Herschell | |
| Keywords | |
| Corporation, separate legal personality, agency | |
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22 is a landmark UK company law case. The effect of the House of Lords' unanimous ruling was to uphold firmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent company could not sue the company's shareholders to pay up outstanding debts.
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. The company purchased Salomon's business for £39,000, which was an excessive price for its value. His wife and five elder children became subscribers and the two elder sons became directors (but as nominee for Salomon, making it a one-man business). Mr Salomon took 20,001 of the company's 20,007 shares which was payment from Salomon incorporated for his old business (each share was worth £1). 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.
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. Salomon's business failed, defaulting on its interest payments on the debentures (half held by Broderip). Broderip sued to enforce his security in October 1893. The company was put into liquidation. Broderip was repaid his £5,000. This left £1,055 company assets remaining, of which Salomon claimed under his retained debentures. This would leave nothing for the unsecured creditors, of which £7,773 was owing. When the company failed, the company's liquidator contended that the floating charge should not be honoured, and Salomon should be made responsible for the company's debts. Salomon sued.
The liquidator, on behalf of the company, counter-claimed wanting the amounts paid to Salomon paid back, and his debentures cancelled. He argued that Salomon had breached his fiduciary duty for selling his business for an excessive price. He also argued the formation of the company in this was fraud against its unsecured creditors.
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