By extending the benefits of incorporation to small private enterprises, the House of Lords in Salomon v Salomon & Co Ltd [1897] AC 22 has facilitated irresponsibility and the protection of particular groups, and it has left unsecured creditors in a precarious position.

1. Are you convinced by the above appraisal of the modern company?

2. To what extent do you think that the development of exceptions to the doctrine of separate legal personality has helped to address concerns of this nature?

Mr. Salomon made leather boots or shoes in a large establishment. His sons wanted to become business partners, so he turned the business into a limited company. The company purchased Salomon’s business on an excessive price for its value. His wife and five elder children became subscribers and the two elder sons became directors. Mr. Salomon took 20,001 of the company’s 20,007 shares which was payment from A Salomon & Co Ltd. for his old business (each share was valued at £1). Transfer of the business took place on 1 June 1892. The company also gave Mr. Salomon £10,000 in debentures. On the security of his debentures, Mr. Salomon received an advance of £5,000 from Edmund Broderip.

Soon after Mr. Salomon incorporated his business there was a decline in boot sales. Salomon’s business failed, defaulting on its interest payments on the debentures (half held by Broderip). Broderip sued to enforce his security. The company was put into liquidation. Broderip was repaid his £5,000. This left £1,055 company assets remaining, of which Salomon claimed under his retained debentures. This would leave nothing for the unsecured creditors. When the company failed, the company’s liquidator contended that the floating charge should not be honoured, and Salomon should be made responsible for the company’s debts. Salomon sued.