Wakilii

Salomon v A Salomon & Co Ltd

Unknown · Salomon v A Salomon & Co Ltd [1897] AC 22 Appeal Allowed AI-generated summary ↓ Download Pin to watchlist Add to matter
Jurisdiction
Uganda
Case Type
Appeal by original appeal and cross-appeal from the Court of Appeal
Decision
Appeal allowed and cross-appeal dismissed. Matter remitted to the Chancery Division.

Observed later treatment

No later-treatment classification is recorded for this judgment.

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Holding

The House of Lords held that a company formed by a trader and six family members to acquire his business, with all statutory requirements satisfied, is validly incorporated under the Companies Act 1862. The company is a separate legal entity, not the vendor's alias or agent. The vendor owes no duty to indemnify the company against debts to unsecured creditors, and there was no fraud upon creditors or shareholders warranting rescission of the sale agreement. The judgments of the High Court and Court of Appeal were reversed.

Outcome

Appeal allowed and cross-appeal dismissed. Matter remitted to the Chancery Division.

Facts

Aron Salomon carried on a prosperous boot and shoe manufacturing business. In July 1892, he transferred his solvent business to a limited company, A Salomon and Company Limited, formed by himself, his wife, daughter, and four sons, each subscribing for one share. The company adopted the sale agreement, and Salomon received 20,000 fully paid shares, £10,000 in debentures, and approximately £1,000 in cash as purchase price. The debentures formed a floating security. All shareholders knew and approved the sale terms and all statutory requirements were met. The company later encountered financial difficulties, went into liquidation, and after satisfying the debentures held by a third party (to whom Salomon had transferred them to raise funds for the company), insufficient assets remained to pay unsecured creditors. The liquidator brought a counter-claim alleging fraud and seeking indemnity from Salomon against the company's debts.

Issues

  1. Whether a company consisting only of a trader and six members of his family, formed to acquire his business, is validly incorporated under the Companies Act 1862.
  2. Whether such a company is contrary to the true intent and meaning of the Companies Act 1862.
  3. Whether the vendor of the business is liable to indemnify the company against claims by unsecured creditors.
  4. Whether the contract for the sale of the business to the company should be rescinded on the grounds of fraud.

Orders

  • Appeal allowed.
  • Order of the Court of Appeal reversed.
  • Cross-appeal dismissed with costs.
  • Cause remitted to the Chancery Division.
  • Costs in the House of Lords to be taxed as appropriate for a pauper litigant.

Rules and key headnotes

Company Law — Incorporation — Validity of Incorporation — Seven Subscribers — Companies Act 1862
Under the Companies Act 1862, a company may be validly incorporated if seven persons subscribe to the memorandum of association and all statutory requirements are met, regardless of whether the subscribers are related to one another or whether one subscriber holds a predominant number of shares.
Company Law — Separate Legal Personality — Corporate Entity — Distinction from Members
Once a company is legally incorporated, it is a distinct legal person with rights and liabilities of its own, separate from its members, and it cannot be treated as the mere alias, agent, or nominee of a shareholder, even if that shareholder holds the vast majority of shares.
Company Law — Limited Liability — Purpose of the Companies Act — Formation of Private Company
The Companies Act 1862 permits any lawful business, including the business of a sole trader, to be carried on by a limited company for the express purpose of limiting the liability of its members, and there is nothing in the Act which prohibits such a company being formed even if substantially all shares are held by one person.
Company Law — Debentures — Vendor's Right to Hold Debentures — Security for Creditors
A member of a company, acting in good faith, is entitled to take and hold the company's debentures as security, in the same manner as any outside creditor, and the creation of such debentures is not unlawful merely because they are issued to the vendor of the business as part of the purchase price.
Company Law — Fraud on Creditors — Knowledge and Notice — Register of Members and Debentures
Creditors who deal with a limited company have constructive notice of the contents of the memorandum and articles of association and the register of shareholders and debentures, and they cannot claim to have been defrauded if they fail to inform themselves of these matters which the Companies Act 1862 requires to be publicly available.
Contract Law — Rescission — Fraud — Absence of Independent Board — Unanimous Shareholder Consent
Where a company consists of a small number of members, all of whom are aware of and consent to a contract between the company and one of the members, the absence of an independent board of directors does not afford grounds for rescission for fraud, and the company is bound by the unanimous agreement of its members in a matter within its powers.

Legislation cited (4)

Cases cited (15)

  • Reg v Arnand (1846) 9 Q.B. 806
  • In re Ambrose Lake Tin and Copper Mining Co (1880) 14 Ch. D. 390
  • In re British Seamless Paper Box Co (1881) 17 Ch. D. 467
  • Farrar v Farrars, Limited (1888) 40 Ch. D. 395
  • North-West Transportation Co v Beatty (1887) 12 App. Cas. 589
  • In re National Debenture and Assets Corporation [1891] 2 Ch. 505
  • In re George Newman & Co [1895] 1 Ch. 674
  • Erlanger v New Sombrero Phosphate Co (1878) 3 App. Cas. 1218
  • Adam v Newbigging (1888) 13 App. Cas. 308
  • Western Bank of Scotland v Addie (1867) L.R. 1 H.L., Sc. 145
  • Clarke v Dickson (1858) E.B. & E. 148
  • Ex parte Cowen (1867) L.R. 2 Ch. 563
  • In re Smith (1890) 25 Q.B.D. 536
  • Broderip v Salomon [1895] 2 Ch. 323
  • In re Baglan Hall Colliery Co (L.R. 5 Ch. 340)

Full judgment

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Salomon v A Salomon & Co Ltd [1897] AC 22
Source: this page presents Wakilii’s issue analysis and metadata for a publicly reported Ugandan judgment. Any AI-generated summary is marked as such. Judgment text is sourced from the Uganda Legal Information Institute (ulii.org). Wakilii is not affiliated with ULII.