Corporate Case Brief – Solomon v. Solomon & Co. Ltd.

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Facts: Mr Salomon had incorporated his long standing personal business of shoe manufacture into a limited company. He held 20,001 shares and the other 6 members of his family each got one share making a total of 20,007 shares. The company failed after sometime. The debentures in the company were held mainly by Broderip and Mr Salomon himself. Upon liquidation of the company, Broderip got back his share of debenture money. The rest was taken up by Mr. Salomon himself as he was the next big secured debenture holder. Therefore the minor unsecured creditors got nothing from the liquidation.

Issue: Should the amount that was paid to Mr Salomon, the major debenture holder, be paid back to the company and distributed amongst the minor unsecured creditors?

Holding:

• High Court – Company is an agent of Mr. Salomon. He should pay the Company’s debt.
• Court of Appeal – Agreed with the HC. Decision upheld.
• House of Lords – The Company was a separate legal entity and a distinct independent corporation. A majority shareholder does not own the Company. The Company will not lose its identity to the majority shareholder.

Ratio:

• The Company is a separate legal entity.
• The creditors of a company cannot sue the company’s shareholders to pay the company’s debts.

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