The rule in Salomon v Salomon & Co [1897] AC 22 has been described as Essay - 3

The rule in Salomon v Salomon & Co [1897] AC 22 has been described as one of the corner stones of English Company Law. Discuss the rationale and impact of the decision on company law - Essay Example This decision was reached to protect the company shareholders from being sued by creditors to pay up unresolved arrears in case the company became bankrupt. Mr. Salomon Aron ran a successful business that manufactured leather boots and shoes. Once his sons came of age, they developed a particular interest in joining their father to run the business. In fact, they wanted to be partners of their father in the same business. Mr. Salomon therefore made a decision to convert his business into a limited entity. The business was bought from Mr. Salomon by the new company at 39000 pounds. This amount however far much superseded the real value of the business. In addition, Mr. Salomon included his spouse and his other five kids as enterprise subscribers. His two sons, as his own nominees became the company’s directors. With this kind of an arrangement, it essentially meant that the company was in reality Mr. Salomon’s. Out of the company’s total shares of 20,007, Salomon owned and controlled 20,001 shares. On 1st of June 1892, the company was legally and officially incorporated. Furthermore, the company dished out debentures worth 10000 pounds to Salomon. These are form of liability that has no collateral or physical resources as security. Its only security is the solvency and standing of the issuer. As part of the safety to his debentures, Salomon acknowledged 5000 pounds from Edmund Broderip. However, just after the business was integrated, the enterprise began to go down as the sale of boots astronomically deteriorated. The problems were worsened by constant strike of workers. The major market for Salomon was the government and so in a bid to sidestep the danger of its providers being crippled by the forays, the government went ahead and fragmented the contracts (J Armour, 2003). Eventually, the business was botched. He shirked on interest returns on the debentures, half of which were held by Broderip.