Salomon v A Salomon & Co Ltd

For the past few weeks, we have been exposed to the understanding of company law. Company law which most popularly known as corporate law had lots of distinct ways that protects and disclosed the rights of the owners, and the consequences of ownership. It differs a lot as to compare with sole proprietorship and also partnership in a way that, both are different entity, that infers separate legal entity in every way of a company can be.

With one of the most interesting case that is brought on will be Salomon v A Salomon & Co. Ltd. And below are the excerpts that I got from Wikipedia for the actual story of the case;

Mr Aron Salomon was not a leather boot and shoe manufacturer. His firm was in Whitechapel High Street, with warehouses and a large establishment. He had had it for 30 years and "he might fairly have counted upon retiring with at least £10,000 in his pocket." He had a wife, a daughter and five sons. Four of the sons worked with him. The sons wanted to be partners, so he turned the business into a limited company. The wife and five eldest children became subscribers and two eldest sons also directors. Mr Salomon took 20,001 of the company's 20,007 shares.

The price fixed by the contract was £39,000, which was "extravagent" and not "anything that can be called a business like or reasonable estimate of value." Transfer of the business happened on June 1, 1892. Purchase money for the business was paid, totalling £20,000, to Mr Salomon. £10,000 was paid in debentures to Mr Salomon as well (ie, Salomon gave the company a loan, secured by a charge over the assets of the company). The balance paid went to extinguish the business’ debts (£1000 of which was cash to Salomon).

But soon after Mr Salomon incorporated his business, there was economic trouble. A series of strikes in the shoe industry led the government, Salomon's main customer, to split its contracts between more firms (the Government wanted to diversify its supply base to avoid the risk of its few suppliers being crippled by strikes). His warehouse was full of unsold stock. He and his wife lent the company money. He cancelled his debentures. But the company needed more money, and they sought £5000 from a Mr Edmund Broderip. They gave him a debenture, the loan with 10% interest and secured by a floating charge. But the business still failed, and they could not keep up with the interest payments. In October 1893 Mr Broderip sued to enforce his security. That was the end. The company was put into liquidation. Mr Broderip was paid but other unsecured creditors were not.

The liquidator met Broderip’s claim with a counter claim, joining Salomon as a defendant, that the debentures were invalid for being issued as fraud. The liquidator claimed all the money back that was transferred when the company was started: rescission of the agreement for the business transfer itself, cancellation of the debentures and repayment of the balance of the purchase money.

So in this case, from the passage above, it is very clear of something that the doctrine of corporate separate legal entity rules. As Mr. Broderip may have filed a lawsuit toward Salomon, whom apparently was the holder of that debentures, but with the company's name. Thus, Mr. Broderip first step is supposed to be suing the company namely A.Salomon & Co. Ltd., as Aron Salomon had nothing to be liquidated. His loss is limited to the liability or the amount that he invested on or having shares of the company. The blunder of the Mr. Broderip ended up, being able to take the money but was forced to claimed back as the liquidator claimed his debentures were invalid. Thus, in making corporate agreements or contracts with others, a very clear point is that, one should always be aware of the rightful person that should be issued your resources eg. money.

Let's say A is your good friend, a very very good friend. Thus, he is the owner of company Aiyo Bhd., and his total capital invested in the company is RM 5000, let's say. You, the good friend of A is a rich guy as well. And one day, when A's company were facing insolvency problem and soon lead to the company's in crisis that they have to tear up the company. The company is insolvent for about RM 1 million, and you are requested by your friend to help. So in this case, if you are issuing your nice big amount of money of cheque, do issue to the company and not to A (where he will beg you like s**t to send to him). Continually worse case scenario that the company is put into liquidation, if you give to the company, you are able to succumbed to earn back your money if strict procedures is followed. However, if you issued to your friend, suing him will only earned you back abruptly RM 5000, as that is his limited liability. So be aware of such scenarios, cronies are there a lot!