Saloman Vs.

Saloman- an eye opener to understand separate legal entity

Saloman (1897) was a sole trader, who used to make and sell shoes from his sole
enterprise under the banner of Saloman Enterprises. He used to procure the raw
material on credit from suppliers. One day, he converted his sole enterprise into a
Limited Liability Company namely Saloman and Co. Ltd. People could not understand
much and considered it as a change of the name and nothing else. The promoters, who
subscribed the shares of the company, were Saloman himself, his wife, daughter and
four sons. They contributed in total USD 7,00,000.

After few days the company issued debentures of USD 10,00,000 which were also
subscribed by the same seven equity shareholders. The liability of Saloman and Co. Ltd.
showed a total of USD 25,00,000 which included equity (USD 7,00,000) and debentures
(USD 10,00,000) as given above and trade creditors of USD 8,00,000. Of course, the
book value of the assets was also USD 25,00,000, but most of the assets were outdated
and were pennyless.

Saloman applied to court for bankruptcy. After completing the legal procedure, the
court ordered the winding up of the company and a legal receiver was appointed. The
trade creditors, to whom company owed USD 8,00,000, could come to know the facts
that the assets of the company were likely to realize USD 6,50,000. Apart from this,
they came to know that the personal property of Saloman was worth USD 4,00,000.
They had a faith that they would recover their dues from Saloman and Co. Ltd.,
collectively from business assets and from the personal wealth of Mr. Saloman.

But the legal receiver sold the business assets for USD 6,50,000 and paid off the dues of
the debenture holders and paid nothing to trade creditors. The trade creditors
appealed to court by saying the entity of Saloman and his family members as owners
and that of the company is same; accordingly the money realized by the legal receiver
should be used in paying off the dues of trade creditors. But the court gave a verdict
that the concept of same legal entity is applicable only in case of sole enterprise and
partnership concern, but not in case of a limited liability company. The liability of
equity shareholders is limited and not unlimited as in the case of sole proprietorship
and partnership business.