Salomon Casestudy

Topics: Corporation, Limited liability, Legal entities Pages: 11 (3718 words) Published: June 24, 2013
Salomon v A Salomon & Co Ltd
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Salomon v A Salomon & Co Ltd|

Whitechapel High Street|
Court| House of Lords|
Citation(s)| [1897] AC 22|
Case history|
Prior action(s)| Broderip v Salomon [1895] 2 Ch. 323|
Case opinions|
Lord Macnaghten, Lord Halsbury and Lord Herschell|
Corporation, separate legal personality, agency|
Salomon v A Salomon & Co Ltd [1897] AC 22 is a landmark UK company law case. The effect of the 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. Contents  [hide]  * 1 Facts * 2 Judgment * 2.1 High Court * 2.2 Court of Appeal * 2.3 House of Lords * 3 Significance * 4 See also * 5 Notes * 6 References| -------------------------------------------------

Facts [edit]
Mr Aron Salomon made leather boots and shoes in a large Whitechapel High Street establishment. He ran his business for 30 years and "he might fairly have counted upon retiring with at least £10,000 in his pocket." His sons wanted to become business partners, so he turned the business into a limited company. His wife and five eldest children became subscribers and two eldest sons also directors. Mr Salomon took 20,001 of the company's 20,006 shares. The price fixed by the contract for the sale of the business to the company was £39,000. According to the court, this was "extravagant" and not "anything that can be called a business like or reasonable estimate of value." Transfer of the business took place on June 1, 1892. The purchase money the company paid to Mr Salomon for the business was £20,000. The company also gave Mr Salomon £10,000 in debentures (i.e., Salomon gave the company a £10,000 loan, secured by a charge over the assets of the company). The balance paid went to extinguish the business's debts (£1,000 of which was cash to Salomon). Soon after Mr Salomon incorporated his business a decline in boot sales, exacerbated by a series of strikes (organised by the National Union of Boot and Shoe Operatives) led the government, Salomon's main customer, to split its contracts among more firms. The government wanted to diversify its supply base to avoid the risk of its few suppliers being crippled by strikes. His warehouse was full of unsold stock. He and his wife lent the company money. He cancelled his debentures. But the company needed more money, and they sought £5,000 from a Mr Edmund Broderip. He assigned Broderip his debenture, the loan with 10% interest and secured by a floating charge. But Salomon's business still failed, and he could not keep up with the interest payments. In October 1893, Mr Broderip sued to enforce his security. The company was put into liquidation. Broderip was repaid his £5,000, and then the debenture was reassigned to Salomon, who retained the floating charge over the company. The company's liquidator met Broderip's claim with a counter claim, joining Salomon as a defendant, that the debentures were invalid for being issued as fraud. The liquidator claimed all the money back that was transferred when the company was started: rescission of the agreement for the business transfer itself, cancellation of the debentures and repayment of the balance of the purchase money. -------------------------------------------------

Judgment [edit]
High Court [edit]
At first instance, the case entitled Broderip v Salomon[1] Vaughan Williams J said Mr Broderip's claim was valid. It was undisputed that the 200 shares were fully paid up. He said the company had a right of indemnity against Mr Salomon. He said the signatories of the memorandum were mere dummies, the company was just Mr Salomon in another form, an alias, his agent. Therefore it was entitled to indemnity from the...
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