Law Case Study
Facts of Solomon v Solomon
Solomon was a leather merchant who converted his business into a Limited Company as Solomon & Co. limited (the ‘company’). The company so formed consisted on Solomon, his wife and five of his children as members. The company purchased the business of Solomon for £39,000; the purchase consideration was paid in terms of £10,000 debentures conferring a charge over the company’s assets, £20,000 in fully paid, £1 share each and the balance in cash.
The company in less than one year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Solomon himself). And nothing was left for unsecured creditors. The liquidator on behalf of unsecured creditors alleged that the company was a sham and mere a-lias or agent for Salomon.
Court of Appeal:
The British Court of Appeal considered the matter and Kay LJ stated that
“The statue was intended to allow seven or more persons, bona fide associated for the purpose of trade to limit their liability, under certain conditions and to become a corporation. But shareholders of Salomon & Co Ltd. we’re not intended to legalize the pretended association for the purpose of enabling an individual to carry on his business within; limited liability in the name of joint stock company.”
Thus, the focus of court of appeal was that the six family members never intended to take part in the business and only held the shares to fulfill the technicality required by the companies act.
House of Lords:
Lord Macnaghten held that ‘the company is different person altogether from subscribers… and, though it may be that after incorporation the business is precisely the same as it was before and same persons are managers, and same hand receive the profit, the company is not agent for subscriber or trustee for them. Nor are the subscribers as member liable, in any shape or form, except to the extent and manner prescribed by the Act.’
Solomon was a leather merchant who converted his business into a Limited Company as Solomon & Co. limited (the ‘company’). The company so formed consisted on Solomon, his wife and five of his children as members. The company purchased the business of Solomon for £39,000; the purchase consideration was paid in terms of £10,000 debentures conferring a charge over the company’s assets, £20,000 in fully paid, £1 share each and the balance in cash.
The company in less than one year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Solomon himself). And nothing was left for unsecured creditors. The liquidator on behalf of unsecured creditors alleged that the company was a sham and mere a-lias or agent for Salomon.
Court of Appeal:
The British Court of Appeal considered the matter and Kay LJ stated that
“The statue was intended to allow seven or more persons, bona fide associated for the purpose of trade to limit their liability, under certain conditions and to become a corporation. But shareholders of Salomon & Co Ltd. we’re not intended to legalize the pretended association for the purpose of enabling an individual to carry on his business within; limited liability in the name of joint stock company.”
Thus, the focus of court of appeal was that the six family members never intended to take part in the business and only held the shares to fulfill the technicality required by the companies act.
House of Lords:
Lord Macnaghten held that ‘the company is different person altogether from subscribers… and, though it may be that after incorporation the business is precisely the same as it was before and same persons are managers, and same hand receive the profit, the company is not agent for subscriber or trustee for them. Nor are the subscribers as member liable, in any shape or form, except to the extent and manner prescribed by the Act.’