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His wife and five elder children became subscribers and the two elder sons became directors. Transfer of the business took place on 1 June Soon after Mr Salomon incorporated his business there was a decline in boot sales.
The company failed, defaulting on its interest payments on its debentures half held by Broderip. Broderip sued to enforce his security.
The company was put into liquidation. If Salomon's claim was successful 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. The liquidator , on behalf of the company, counter-claimed wanting the amounts paid to Salomon paid back, and his debentures cancelled.
He argued that Salomon had breached his fiduciary duty to the new company he was promoting by selling his business for an excessive price.
He also argued that the whole formation of the company in this way was intended as a fraud against its potential unsecured creditors in the future.
It was undisputed that the shares were fully paid up. He said the company had a right of indemnity against Mr Salomon.
He said the signatories of the memorandum of incorporation were mere "dummies" and that the company was really just Mr Salomon in another form, an alias or at least, his agent.
Therefore, it was entitled to indemnity from the principal. The liquidator amended the counter claim, and an award was made for indemnity. The agency argument was accepted.
The Court of Appeal  confirmed Vaughan Williams J's decision against Mr Salomon, though on the grounds that Mr Salomon had abused the privileges of incorporating a limited liability company, which Parliament had intended only to confer on "independent not counterfeit shareholders, who had a mind and will of their own and were not mere puppets".
Lindley L J. The incorporation of the company cannot be disputed see s. Whether by any proceeding in the nature of a scire facias the Court could set aside the certificate of incorporation is a question which has never been considered, and on which I express no opinion, but, be that as it may, in such an action as this the validity of the certificate cannot be impeached.
The company must, therefore, be regarded as a corporation, but a corporation created for an illegitimate purpose.
As the company must be recognised as a corporation, I feel a difficulty in saying that the company did not carry on business as a principal, and that the debts and liabilities contracted in its name are not enforceable against it in its corporate capacity.
But it does not follow that the order made by Vaughan Williams J. A person may carry on business as a principal and incur debts and liabilities as such, and yet be entitled to be indemnified against those debts and liabilities by the person for whose benefit he carries on the business.
The company in this case has been regarded by Vaughan Williams J. I should rather liken the company to a trustee for him - a trustee improperly brought into existence by him to enable him to do what the statute prohibits.
It is manifest that the other members of the company have practically no interest in it, and their names have merely been used by Mr.
Aron Salomon to enable him to form a company, and to use its name in order to screen himself from liability. I do not go so far as to say that the creditors of the company could sue him.
In my opinion, they can only reach him through the company. Moreover, Mr. Aron Salomon's liability to indemnify the company in this case is, in my view, the legal consequence of the formation of the company in order to attain a result not permitted by law.
The liability does not arise simply from the fact that he holds nearly all the shares in the company. A man may do that and yet be under no such liability as Mr.
Aron Salomon has come under. His liability rests on the purpose for which he formed the company, on the way he formed it, and on the use which he made of it.
There are many small companies which will be quite unaffected by this decision. But there may possibly be some which, like this, are mere devices to enable a man to carry on trade with limited liability, to incur debts in the name of a registered company, and to sweep off the company's assets by means of debentures which he has caused to be issued to himself in order to defeat the claims of those who have been incautious enough to trade with the company without perceiving the trap which he has laid for them.
It is idle to say that persons dealing with companies are protected by s. It is only when a creditor begins to fear he may not be paid that he thinks of looking at the register; and until a person is a creditor he has no right of inspection.
As a matter of fact, persons do not ask to see mortgage registers before they deal with limited companies; and this is perfectly well known to every one acquainted with the actual working of the Companies Acts and the habits of business men.
Aron Salomon and his advisers, who were evidently very shrewd people, were fully alive to this circumstance. If the legislature thinks it right to extend the principle of limited liability to sole traders it will no doubt do so, with such safeguards, if any, as it may think necessary.
But until the law is changed such attempts as these ought to be defeated whenever they are brought to light They do infinite mischief; they bring into disrepute one of the most useful statutes of modern times, by perverting its legitimate use, and by making it an instrument for cheating honest creditors.
Lopes L J. The House of Lords unanimously overturned this decision, rejecting the arguments of agency. They held that there was nothing in the Act about whether the subscribers i.
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