Salomon was a shoemaker and he was running his business in a limited company form, A. Salomon & Co. It was a limited company in which it was not necessary for the company members to pay the debt if the company had no sufficient asset to liquidate into cash to pay creditors.
His wife and his 5 children had 6 shares for each of them, Salomon was holding another 20001 shares out of 20007 if the company. the company was under control by Salomon as he had most of the shares of the company. Some Parts of his shares are paid by using Debenture (A Secured loan Certificate, which has a seniority to get debt back from the company.)
The company went into bankruptcy where there is an incapability to pay off its debt to unsecured creditors by liquidating its assets. Besides, The Secured creditors had the priority to get the receivable payment. Salomon was also a Secured Creditor of A. Salomon & Co. Ltd, because he also held the debenture of the company which he was secured to get seniority of repayment of debt.
Since unsecured creditor could not get back their claims, Salomon was sued. He was sued because he was not deserved to get any money unless he paid off all the debt of the company before. He was the one who own the company, therefore the responsibility of paying debt should go to Salomon.
On the other side, Salomon was arguing that he was the one who only operating the company, and not necessary the company debt was his obligation to pay off. Therefore, he refused to pay all the debt to creditors who was getting back their claims.
Held:
The judgement held that even though Salomon's Co Ltd was owned by Salomon himself and he had almost the power to control the company to behave like what he did, but the company and Salomon were separately different entity in law.
This company could be counted as a legal entity which incorporated by 2 or more persons, yet It did not mean the company could be controlled by only a single person. Since, it was separated to be a legal person in law, it just acted like a normal person, therefore it has the right to sue and maybe sued by others.
Therefore, the decision was the company was legal separated person with Salomon. So, he could refuse to pay off the debt of the company.
