Mr. Aron Salomon converted his boot and shoe manufacturing business into a limited company. He owned 20,001 of the company's 20,007 shares while family members each held one share. When the company went into liquidation due to financial difficulties, creditors argued the company was a sham. However, the House of Lords upheld the separate legal identity of the company, finding no evidence of fraud, and ruled that creditors could only seek repayment from the company's assets, not Mr. Salomon personally. This established that a company is a separate legal entity from its shareholders.

1. SOLOMON Vs SOLOMON & CO.LTD.(1897)A.C.22 03/05/10 11:21 Ghanshyam IILM Gurgaon

2. INTrODUCTION Mr Aron Salomon was a leather boot and shoe manufacturer. He had a wife, a daughter and five sons. Converted his business into a limited co. Company purchased the business of Solomon at 40000 pound Purchase consideration was in terms of 10000 debenture, 20000 equity share and 10000 was in cash 03/05/10 11:21 Ghanshyam IILM Gurgaon

3. Mr Salomon took 20,001 of the company's 20,007 shares. And his wife and all the son and a daughter took one share each . The wife and five eldest children became subscribers and two eldest sons also directors. 03/05/10 11:21 Ghanshyam IILM Gurgaon

4. Liquidation of Solomon Co. The business of the company wind up in the depression and the company went into liquidation after a year. The assets of the company is not sufficient. Nothing was left for unsecured creditors The unsecured creditors sued Salomon and they contended that Salomon & Co. Ltd was a fraud and contrary to the meaning and intent of the Companies Law. 03/05/10 11:21 Ghanshyam IILM Gurgaon

5. Separate legal entity 1.A separate legal entity refers to a legal entity with accountability. 2.SLE legally separate business from individual or owner Like limited liability company or a corporation 03/05/10 11:21 Ghanshyam IILM Gurgaon

6. Contd…. It is a better form of existence for the reason it takes its responsibilities itself, owners are free from their personal liabilities and owners enjoy limited personal liability (risk) only up to their investments in stocks, though there may be certain situations where their personal responsibilities can exceed from limited liability concept. 03/05/10 11:21 Ghanshyam IILM Gurgaon

7. The House of Lords did not find any form of fraud or deliberate abuse of the corporate form, on the contrary Salomon was a victim in that he did his best to rescue his company by cancelling the debenture he took and raising them to an outside creditor who provided fresh loan capital. Judgment 03/05/10 11:21 Ghanshyam IILM Gurgaon

8. This honesty and good faith on the part of Salomon prevented him from indemnifying the company creditors. The Houseof Lords found there is a legal entity properly formed and there was no use of liftingthe veil between Salomon and his company. the business belonged to it and not to Mr Salomon.” As a result of the Court of Appeal refusal to recognise the existence of the legal entity and regarding the company instead as a myth and fiction, they thought that the business belonged to Aron Salomon. 03/05/10 11:21 Ghanshyam IILM Gurgaon

9. Conclusion The House of Lords found that honesty and good faith on Salomon’s part prevented him from indemnifying the company creditors as they knew they were dealing with a legal person totally different from his incorporators. Limited liability at that time was also available to sole traders and large investors who wanted some form of limit on their undertakings. 03/05/10 11:21 Ghanshyam IILM Gurgaon

10. 03/05/10 11:21 Ghanshyam IILM Gurgaon