KOLEJ UNIKOP

COLLABORATION WITH

UNIVERSITI TEKNOLOGI MARA

FACULTY BUSINESS MANAGEMENT
DIPLOMA IN OFFICE MANAGEMENT AND TECHNOLOGY
(BM118)

SUBJECT:
PRINCIPLES OF CORPORATE COMPLIANCE
(OMT 340)

ASSIGNMENT:
GROUPING ASSIGNMENT
CASE REVIEW
CASE III: SALOMON V. SALOMON & CO. LTD. [1897]

PREPARED BY:
NAME MATRIC NUMBER
DONACELLA ANAK DIYO 2012612398
NUR FATEHA SYUHADA BINTI RAKIMAN 2012695974
SITI SUHAIDA BINTI OMAR 2012283002
FARAH HANIM BINTI HUSSIN 2012824842
NURUL NADHEERA BINTI ZULKIFELI 2012270936

PREPARED FOR:
SUHAILA NORA BINTI SULAIMAN
SUBMITTED DATE:
21 JULY 2014
Case III: Salomon v. Salomon & Co. Ltd. [1897]
FACTS

Mr. Saloman, the owner of a very prosperous shoe business, sold his business for the sum of £
30,000 to Saloman and Co. Ltd. which consisted of Saloman himself, his wife, his daughter and
his four sons. The purchase consideration was paid by the company by allotment of 23,000
shares and £10,000 debentures and the balance in cash to Mr. Saloman. The debentures
carried a floating charge on the assets of the company. One share of £ 1 each was subscribed
by the remaining six members of his family. Saloman and his two sons became the directors of
this company. Saloman was the managing Director. After a short duration, the company went
into liquidation. At that time the statement of affairs’ was like this:

Assets :$ 6000,
Liabilities:
Saloman as debenture holder $ 10,000
Unsecured creditors $ 7,000.

Thus its assets were running short of its liabilities b $11,000. The unsecured creditors claimed a
priority over the debenture holder on the ground that company and Saloman was one and the
same person and the company was a mere agent in the eyes of law. But the House of Lords
held that the existence of a company is quite independent and distinct from its members and
that the assets of the company must be utilized in payment of the debentures first in priority to
unsecured creditors. The court held that though virtually Saloman was the holder of all the
shares in the company, he was also the secured creditor and was entitled to repayment in
priority to the unsecured creditors.

It was held by the House of Lords that despite Mr. Salomon having the control over the
company, it was neither his agent nor trustee. This is because, a company was treated as
operating the business in its own right, and as being separate from its controller, i.e. in this case
of Mr. Salomon. Therefore, the charge given by the company to Mr. Salomon was valid and he
was entitled to be paid his debt even though other creditors of the company would not be paid
because the company had insufficient assets to pay all its creditors.
Thus, it shows that a company is a legal person separate and distinct from its individual
members or directors as in the words of Cave J in Re Sheffield & South Sheffield Yorkshire
Permanent Building Society, In Liquidation [1889]: ‘a company is a legal persona just as much
as an individual'.
Saloman’s case established beyond doubt that in law a registered company is an entity distinct
from its members, even if the person hold all the shares in the company. There is no difference
in principle between a company consisting of only two shareholders and a company consisting
of two hundred members. In each case the company is a separate legal entity.
ISSUES

The issue arises when the company’s business turns to be a failure. The value of the assets
was insufficient to pay out both Mr. Salomon and the company’s other creditors. Consequently,
the creditors raised an issue whereby they argued that Mr. Salomon should not receive the
payment from the company because the degree of control he exercised over the company.
Thus its assets were running short of its liabilities. It was held by the House of Lords that despite
Mr. Salomon having the control over the company, it was neither his agent nor trustee.
Therefore, the charge given by the company to Mr. Salomon was valid and he was entitled to be
paid his debt even though other creditors of the company would not be paid because the
company had insufficient assets to pay all its creditors.

HELD/ DECISION OF COURT

This case was held by the House of Lords.

OPINION

In our opinion on this case, firstly, Salomon & Co. Ltd. has perpetual succession. This company
still existence continuously until the company winding up as a sudden slow in business occurred
and the company could no longer pay interests to Salomon even the wife put money, but the
company still cannot pay.

Secondly, according to Company Act 1965, if the company own debts to the creditor, the
creditors should not appoint the debts to the shareholders but the company should fully take
responsible on the debts.

Next, based on Salomon & Co. Ltd, Salomon has sells the company assets and the
shareholders assets too. According to Company Act 1965, Salomon should not sell the
shareholders assets because the shoe business belonged to the company and not to Salomon
once the contracts were entered into between Salomon and the company. Company can own
the assets and shareholders have no proprietary interest in those assets.

Besides, one of the main key source of separate personality it can be said that the concept of
limited liability and separate personality go hand in hand. One of the prime main goodness of
the principle being set down in Salomon versus Salomon & Company Ltd. was formed of the
concept of the liability in additional to the corporate legal personality. This concept also blessing
in disguise as businessman like Salomon could now protect their personal asset from the
company in case failure of the business.

Even thought, the declaration mean that Mr. Salomon being accused trickery and not honestly.
Nothing proof to support such an accusation intention for which Mr. Salomon and the other
subscriber to the memorandum were associated was lawful.

Last but not least, the truth that Mr. Salomon gets £5,000 for the company on debentures that
belonged to him seems to usu strong evidence of his good discretion and his belief in the
company.