Salomon had, for some years, carried on a prosperous business as leather merchant and boot manufacturer.
He formed a limited company consisting of himself, his wife, his daughter and his four sons as the shareholders,
all of whom subscribed for 1 share each so that the actual cash paid as capital was £ 7. Salomon sold his
business (which was perfectly solvent at that time), to the Company for the sum of £ 38,782. The company’s
nominal capital was £ 40,000 in £ 1 shares. In part payment of the purchase money for the business sold to the
company, debentures of the amount of £ 10,000 secured by a floating charge on the company’s assets were
issued to Salomon, who also applied for and received an allotment of 20,000 £ 1 fully paid shares. The remaining
amount of £ 8,782 was paid to Salomon in cash. Salomon was the managing director and two of his sons were
other directors.
The company soon ran into difficulties and the debentureholders appointed a receiver and the company went
into liquidation. The total assets of the company amounted to £6050, its liabilities were £10,000 secured by
debentures, £8,000 owning to unsecured trade creditors, who claimed the whole of the company’s assets, viz.,
£6,050, on the ground that, as the company was a mere ‘alias’ or agent for Salomon, they were entitled to
payment of their debts in priority to debentures. They further pleaded that Salomon, as principal beneficiary, was
ultimately responsible for the debts incurred by his agent or trustee on his behalf. The trial judge and the Appellate
Court agreed with these contentions and decreed against Salomon. The House of Lords disagreeing with the
lower Courts, repudiated these contentions and accepted the appeal and reversed the order of the Appellate
Court. The House of Lords held that on registration, the company comes into existence and attains maturity on
its birth. There is no period of minority, no interval of incapacity. It has its own existence or personality separate
and distinct from its members and, as a result, a shareholder cannot be held liable for its acts even though he
holds virtually the entire share capital. Thus, the case also established the legality of what is known as “one-man
company”. The case also recognised that subscribers do not have to be independent or strangers to one another.
The case also recognised the principle of limited liability. It also established that a person can be at the same
time a member, a creditor and an employee of the company, as well as its director.

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