Basic facts:

Aaron Salomon was a successful leather merchant in Whitechapel who specialized in manufacturing leather boots. For many years he ran his business as a sole trader/sole proprietor under name A. Salomon & Co.
By 1892, his sons had become interested in taking part in the business. Salomon decided incorporate his business as a limited liability company in accordance with the requirements set out in the Companies Act 1862 (UK). At the time the legal requirement for incorporation was that at least seven persons subscribe as members of a company i.e. as shareholders.
The company was called Salomon & Co. Ltd. The 7 shareholders were Mr. Salomon, his wife, daughter and four sons.
Two of his sons became directors. Mr. Salomon himself became managing director.
Mr. Salomon owned 20,001 of the company's 20,007 shares - the remaining six were shared individually between the other six shareholders (one share each). - majority shareholder
Mr. Salomon sold his business to the new corporation for almost £39,000, of which £10,000 was a debt to him. According to the Court, this was "extravagant" and not "anything that can be called a business like or reasonable estimate of value." (He should have got a valuation to show it was a legitimate transaction)
Parts of the sale proceeds went to pay Salomon’s [then] personal business creditors.
In effect Salomon received about £1,000, £10,000 in debentures and just over half the company’s shares.
He was thus simultaneously the company's principal shareholder, managing director and its principal creditor.
When company failed, Liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud.
The initial High Court Judge, Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was personally liable for debts to unsecured creditors.
Salomon appealed: The Lords Justices of Appeal variously described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability.
Court of Appeal thus generally upheld the original High Court decision, so Salomon further appealed to House of Lords.

	Created by michellesilson about 10 years ago

ACCT322 - LAW (Case Law) Note on Salomon Case, created by michellesilson on 07/20/2014.