Mr.Salomon was a wealthy man and he was a boot and shoe manufacturer trading on his own sole account. In 1982, he decided to convert the business into a limited company. Fot this purpose, “Aron Salomon and Company Limited” was formed with liability limited by shares. The memorandum of the company was subscribed by Aron Salomon, his wife and five of his children. The intention of having his own family members in the memorandum is to retain the business in their own hands. The company purchased the business for £39,000 and the price was satisfied by a sum amounting to £20,000 was paid to Aron Salomon who then immediately returned it to the company in exchange for fully paid shares; a sum amounting to £10,000 was paid in debentures for the like amount and the balance sum with the exception of about £1,000 which Aron Salomon seemed have received and retained went in discharge of the debts and liabilities of the business at the time of purchase.Apart from the fully paid shares, Aron Salomon received for his business about £1,000 in cash and £10,000 in debentures.
Both Salomon and his wife lent their money to the company to reissue the debentures to Broderip who had advanced the company some money when the business did not turn out well. Broderip’s interest was not paid when it become due. Therefore, Broderip filed a proceeding against the company which resulted in the appointment of a receiver which a year after its incorporation, the company went into liquidation. Because of the liquidation and debt that burden Salomon, they have to sell the company’s asset to pay all the debt. The amount realised from the selling of the asset was only enough to pay Broderip but unfortunately it is not enough to pay the debentures in full and the unsecured creditor of the company. Therefore, the liquidator brought an action against Salomon for the validity of the debentures issued to Salomon on the grounds of fraud. Furthermore, the liquidator also claimed rescission of the agreement that resulted in the transfer of the boot and shoe business to the company. Adding in the claim, the liquidator stated that Salomon must indemnify the company for the £20,000 that he had received from the company as a consequence of the transfer of the business to the company. The main issue before tje court was whether the debenture originally issued to Salomon was valid and therefore ranked in priority to unsecured creditors.
Upon finding the judgement, Vaughan William J held that the company was only an agent for Aron salomon and therefore he is personally bound to pay the unsecured creditors of the company. The House of Lords however reversed the decision of the Court of Appeal stated that Salomon was not personally liable. This is because the company did not conduct the business as an agent nor as a trustee of Salomon. Additionally, the judgement stated that “the company is different person altogether from subscribers. and, though it may be that after incorporation the business is precisely the same as it was before and same persons are managers, and same hand receive the profit, the company is not agent for subscriber or trustee for them. Nor are the subscribers as member liable, in any shape or form, except to the extent and manner prescribed by the Act.” Therefore, the business is belong to the company and not belong to Salomon.