ABSTRACT
Salomon v A Salomon & Co Ltd (1897) HL The appellant, Mr Salomon, was a boot manufacturer in the East End of London. He had been a successful sole trader for over 30 years. The respondent company was formed to purchase and take over the business of Mr Salomon with seven subscribers (the requisite statutory minimum in those days). These subscribers were Mr Salomon who owned 94 of the shares and six members of his family who owned one share each as nominees for Mr Salomon. The purchase price for Mr Salomon’s business was £39,000. Mr Salomon was to receive £20,000 out of future profits as they came into the company, but he took this sum in the form of £10,000 worth of fully paid shares in the company and a debenture worth £10,000 secured over the company. The balance of the purchase price was made up by the company’s discharge of the sole tradership’s debts and liabilities at the time of its transfer. During the year after its incorporation, the new company encountered trading difficulties. The appellant attempted to keep the company going by lending it money raised by way of a mortgage of his debenture, but it was to no avail and the company went into liquidation. When the mortgagee of the debenture brought enforcement proceedings, the liquidator argued that the debenture was invalid as it had been originally obtained through the appellant’s ‘fraud’, in the sense that the formation of what was in effect a one man company amounted to a fraud. The court at first instance and the Court of Appeal found for the liquidator in that they refused to recognise the existence of A Salomon & Co Ltd as a separate legal person. They saw the company as nothing more than Mr Salomon’s nominee, agent or trustee.
