CASE STUDY 3: SALOMON Vs SALOMON

COMPANY LTD.
BY: M. NEHA REDDY
MBA 1ST YEAR
SECTION- B

1. What is the principle in the Salomon vs Salomon company case?

Ans. The primary case that established the Corporate Veil principle is
Salomon v Salomon. It is a major decision in UK Company Law that
firmly upholds the doctrine of corporate personality as a separate legal
entity, implying that shareholders cannot be held personally accountable
for the company's insolvency.

Since the judgement in the case of Salomon v Salomon & Co Ltd, the
principle of separate corporate personality has been firmly established in
the common law, stating that a company has a separate legal identity,
rights, and obligations from those of its shareholders. The case
established some ideas that were later applied in other cases. Corporate
personality and restricted liability, for example, are logical outcomes of
the presence of a separate personality. It's a logical extension of a
company's personality. A corporation can be registered as an unlimited
corporation without benefiting from limited liability.

2. State and explain the facts of Salomon and Salomon case?

Ans. Salomon incorporated his boot-making business (Salomon Ltd.),

which he had previously conducted as a solo proprietorship. Salomon
received shares and debentures with a floating charge (debt security) on
the company's assets as payment for the transfer. When the company's
business failed and it went into bankruptcy later, Salomon's right of
recovery (protected by a floating charge) against the debentures took
precedence over the claims of unsecured creditors, who would have been
left with nothing from the liquidation proceeds.

To prevent such a discriminatory exclusion, the liquidator claimed on

behalf of the unsecured creditors that the firm was a sham, that it was
effectively an agency of Salomon, and that as a result, Salomon was
personally accountable for the obligation. In other words, the liquidator
attempted to ignore Salomon Ltd.'s independent personality from its
member Salomon in order to hold Salomon personally accountable for the
company's debt as if he were still operating as a lone trader.