Debenture

Saloman v Saloman & Co. Ltd. (1897):  Mr. Saloman made leather boots and decided to turn himself into a limited company. In the process he, his wife and his children became the owners of all the ordinary shares but Saloman himself also held a £10,000 debenture. (This is a special type of share secured to the assets of the company that ranks above all other debts of the company in the event of it going into liquidation). Saloman’s company did indeed fall upon hard times and had to be wound up owing various creditors a total of about £8000. Of course the Saloman family lost their original investment in the ordinary shares but Saloman himself demanded all the £6,000 proceeds of the sale of the assets (the boot making machinery) under the terms of his debenture holding. The other creditors did not like this at all, arguing that there was no difference between Saloman the man and Saloman the company. The case went all the way to the House of Lords, England’s highest court, which found in favour of Mr. Saloman. It was held that the company was legally a separate entity from the man and as no fraud had been involved he was, therefore, protected by the ‘veil of incorporation’. The point to note here is the absence of fraud because the courts in most countries are willing to lift the ‘veil of incorporation’ when there is evidence that the directors have
been guilty of fraud. The degree of this willingness differs from country to country