Company Law
Lecture 4
Salomons Case
Salomon v A Solomon & Co Ltd [1897] AC 22
Sole trader
Sold Business to Co owned by himself (20,000 £1 shares) and
6 family members (1 £1 share each) for £38,782
Consideration = cash, shares and debentures
The court looked at did much change on the ground? It was being operated the same way, as far as the
law is concerned he went from being the business owner and manager to becoming a major
shareholder, managering director and he had secured a debenture on the property as well. He was a
creditor aswell
Before After
Mr Salomon Mr Salomon
Business Owner Major Shareholder
Business Manager Managing Director
Secured Director
, He had given himself a mortgage/debenture, outranked other existing creditors, secured loan to
himself, they felt that by him incorporating and giving himself this debenture then he was essentially
defrauding them and using the company as a shell entity that meant if the company did go into
insolvency then he would get the payment first and there would be nothing left over in the company for
them because of limited liability their claims would not revert back to him in anyway
Misusing corporate vehicle to avid his responsibility here that he would have otherwise owed
Vaughan William J. (HC)
Ruled in favor of creditor because he argued the company was his nominee, agency relationship,
principle typically responsible for the behavior of their agents under agency principles or something like
vicarious liability that you would have done in tort law.
held that the debts of the company should be traced now back to Mr Solomon because hes the principal
, bound to indemnify his own agent, famous contradiction
•Not a fraud on the shareholders or on the company
•"It seems to me however that when one considers the fact that these shareholders were nominees of
Mr Salomon's, that he took the whole of the profits and that his intention was to take the profits
without running the risk of debts and expenses, one must also consider the position of the unsecured
trade creditors, ... As I have said, the company was a mere nominee of Mr Salomon's ... and therefore I
wish, if I can, to deal with this case exactly on the basis that I should do if the nominee, instead of being
a company, had been some servant or agent of Mr Salomon's to whom he had purported to sell his
business.”
•“This business was Mr. Salomon's business and no one else’s…he is bound to indemnify that agent.”
Lecture 4
Salomons Case
Salomon v A Solomon & Co Ltd [1897] AC 22
Sole trader
Sold Business to Co owned by himself (20,000 £1 shares) and
6 family members (1 £1 share each) for £38,782
Consideration = cash, shares and debentures
The court looked at did much change on the ground? It was being operated the same way, as far as the
law is concerned he went from being the business owner and manager to becoming a major
shareholder, managering director and he had secured a debenture on the property as well. He was a
creditor aswell
Before After
Mr Salomon Mr Salomon
Business Owner Major Shareholder
Business Manager Managing Director
Secured Director
, He had given himself a mortgage/debenture, outranked other existing creditors, secured loan to
himself, they felt that by him incorporating and giving himself this debenture then he was essentially
defrauding them and using the company as a shell entity that meant if the company did go into
insolvency then he would get the payment first and there would be nothing left over in the company for
them because of limited liability their claims would not revert back to him in anyway
Misusing corporate vehicle to avid his responsibility here that he would have otherwise owed
Vaughan William J. (HC)
Ruled in favor of creditor because he argued the company was his nominee, agency relationship,
principle typically responsible for the behavior of their agents under agency principles or something like
vicarious liability that you would have done in tort law.
held that the debts of the company should be traced now back to Mr Solomon because hes the principal
, bound to indemnify his own agent, famous contradiction
•Not a fraud on the shareholders or on the company
•"It seems to me however that when one considers the fact that these shareholders were nominees of
Mr Salomon's, that he took the whole of the profits and that his intention was to take the profits
without running the risk of debts and expenses, one must also consider the position of the unsecured
trade creditors, ... As I have said, the company was a mere nominee of Mr Salomon's ... and therefore I
wish, if I can, to deal with this case exactly on the basis that I should do if the nominee, instead of being
a company, had been some servant or agent of Mr Salomon's to whom he had purported to sell his
business.”
•“This business was Mr. Salomon's business and no one else’s…he is bound to indemnify that agent.”
