SALOMON V SALOMON CO. LTD (1897)
Salomon v Salomon Co Ltd is a landmark UK company law case. It was basically the first case to uphold the concept of doctrine of corporate legal entity. Aaron Salomon was a Jewish leather merchant in Victorian England. He set up a company with the required seven shareholders (his wife and kids). Mr Salomon took 20,001 of the company's 20,007 shares. The remaining shares goes to his wife and kids. Purchase money for the business was paid, totalling £20,000, to Mr Salomon. £10,000 was paid in bill of exchange or debentures (debenture is a document that either creates a debt or acknowledges it) to Mr Salomon as well.
But soon after that, a series of strikes in the shoe industry led the government, Salomon's main customer, to split its contracts between more firms. His warehouse was full of unsold stock. He and his wife lent the company money. But the business still failed, and they could not keep up with the interest payments. That was the end. The company was put into liquidation. But the company is in insolvent state; assets is less than liability, liability is overwhelming. All the assets is confiscated to paid the creditors.
The question of law was who should be paid first, unsecured creditors (like employees and utility bills) or Salomon himself as a secured creditor. The liquidator asked Mr. Salomon to pay all the creditors since Mr. Salomon was the owner of the company. Salomon did not agree with that because he (Salomon) was supposed to pay for his debentures. But the liquidator asked him to pay to other creditors.
The UK Court of Appeal felt Salomon was a fraud and his company was a "sham". But the House of Lords court stated that the company was properly set up, there was no fraud nor Mr. Salomon formed the company for fraudulent purpose and thus Mr Salomon was a distinct entity from his company, his directorship, his shareholding and his rights as a secured creditor. In the end, Mr Salomon won the case and he did not have to pay all the creditors even though he is a owner of the company because Mr Salomon and the company is two SEPARATE legal entity.
References :
Salomon v Salomon Co Ltd is a landmark UK company law case. It was basically the first case to uphold the concept of doctrine of corporate legal entity. Aaron Salomon was a Jewish leather merchant in Victorian England. He set up a company with the required seven shareholders (his wife and kids). Mr Salomon took 20,001 of the company's 20,007 shares. The remaining shares goes to his wife and kids. Purchase money for the business was paid, totalling £20,000, to Mr Salomon. £10,000 was paid in bill of exchange or debentures (debenture is a document that either creates a debt or acknowledges it) to Mr Salomon as well.
But soon after that, a series of strikes in the shoe industry led the government, Salomon's main customer, to split its contracts between more firms. His warehouse was full of unsold stock. He and his wife lent the company money. But the business still failed, and they could not keep up with the interest payments. That was the end. The company was put into liquidation. But the company is in insolvent state; assets is less than liability, liability is overwhelming. All the assets is confiscated to paid the creditors.
The question of law was who should be paid first, unsecured creditors (like employees and utility bills) or Salomon himself as a secured creditor. The liquidator asked Mr. Salomon to pay all the creditors since Mr. Salomon was the owner of the company. Salomon did not agree with that because he (Salomon) was supposed to pay for his debentures. But the liquidator asked him to pay to other creditors.
The UK Court of Appeal felt Salomon was a fraud and his company was a "sham". But the House of Lords court stated that the company was properly set up, there was no fraud nor Mr. Salomon formed the company for fraudulent purpose and thus Mr Salomon was a distinct entity from his company, his directorship, his shareholding and his rights as a secured creditor. In the end, Mr Salomon won the case and he did not have to pay all the creditors even though he is a owner of the company because Mr Salomon and the company is two SEPARATE legal entity.
References :
- General Principles of Malaysian Law, 5th Edition, Oxford Fajar, Lee Mei Pheng
- http://en.wikipedia.org/wiki/Salomon_v_A_Salomon_&_Co_Ltd
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