Broderip v Salomon
| Jurisdiction | England & Wales |
| Year | 1895 |
| Date | 1895 |
| Court | Court of Appeal |
Private Company - One-man Company - Limited Liability - Sole Trader - Winding-up - Liability to indemnify Company in respect of Debts.
S., a solvent trader, being desirous of carrying on his business with limited liability, caused a limited company to be registered for that purpose with a nominal capital of 40,000l. in 1l. shares. The memorandum of association was subscribed by himself, his wife, his daughter, and his four sons, for one share each, i.e. for seven shares in all. Twenty thousand shares were afterwards allotted to S., but no other shares in the company than the above 20,007 were ever taken. Debentures forming a floating security on the capital were issued to S. in part payment of the amount for which he purported to sell his business to the company. The business went on under the management of S. as managing director, and in a few months an order was made for winding up the company compulsorily. Vaughan Williams J. held that the company was the mere nominee of S.; that if his nominee had been an individual the nominee could have called on S. as his principal to indemnify him from the business liabilities; that the fact of the nominee being a company made no difference; and that S. must indemnify the company against the debts which its assets were insufficient to pay. S. appealed:—
Held, by the Court of Appeal, that the formation of the company and the issue of the debentures were a mere scheme to enable S. to carry on business in the name of the company with limited liability contrary to the true intent and meaning of the
THIS was an appeal by Aron Salomon from an order of Vaughan Williams J. which, in effect, ordered him to indemnify a limited company formed by him against the unsecured debts and liabilities incurred by or in the name of the company while it carried on business.
Aron Salomon carried on business as a leather merchant and hide factor, wholesale and export boot manufacturer, and Government contractor, in Whitechapel, and became desirous of forming a company to take over his business. On July 20, 1892, an agreement was entered into between him and a trustee for a company intended to be formed, by which (1.) Aron Salomon agreed to sell, and the trustee, as such trustee, to buy, the goodwill of the business and the trade-marks for 7500l., to be paid in cash within three weeks after the registration of the company. (2.) The vendor agreed to sell and the trustee to buy the fixtures, fittings, and effects transferable by delivery for 6000l., to be paid in cash within the same period. (3.) The vendor agreed for ten years not to carry on the same business within twenty-five miles from any of the business premises. (4.) That the company should purchase the stock-in-trade at the data of the agreement for 16,000l., to be paid within three week, after registration either wholly in cash or in debentures of the company, or partly in cash and partly in debentures, as the company should elect, the debentures to be secured on the property and effects of the company, including any uncalled capital. (5.) That the company should purchase the bills in hand and book debts at the figures at which they stood in the balance-sheet made out by the vendor on May 31, the company to make payment in cash. (6.) That the company should purchase the interest of the vendor in the leasehold premises of the business for 2500l., to be paid in cash within three weeks after registration. (7.) The vendor agreed, subject to the consent of the landlord, to assign the leases or grant under-leases to a trustee for the company. (8.) The purchase was to take effect as from June 1, 1892, and was to be completed on August 4, 1892. (9.) Until completion the business was to be carried on by the vendor in the usual manner; and as from and after the day next preceding August 4, 1892, he was to be considered as carrying it on for the benefit of the company, and was to account to the company for the benefits received therefrom. (10.) That the vendor should pay and discharge all the debts and liabilities of his the vendor in and about the business which were subsisting on June 1, 1892, and indemnify the company against them. (11.) That the vendor should discharge all outgoings in respect of the leaseholds to June 1, 1892.
The total purchase-money (including the price of book debts, which stood at 6782l. 19s. 7d.) was 38,782l. 19s. 7d.
In framing this agreement and in arriving at the sums to be paid by the company, no one acted on behalf of the proposed company, of which A. Salomon himself was the promoter. His books were made up by an accountant employed by him, no one else had anything to do with the matter, and he in fact settled the figures and dictated the terms to be found in the agreement. The prices which the company was to pay considerably exceeded the amounts appearing in the balance-sheet. At the date of the agreement Salomon owed 7679l. 12s. 6d., but his business was solvent.
On July 28, 1892, a limited company was registered for the purpose of carrying out the above agreement, with such modifications (if any) as might be agreed to, and of carrying on A. Salomon's business. The nominal capital was 40,000&L, divided into 40,000 shares of 1l. each. The memorandum of association was subscribed by Aron Salomon and his wife and daughter and his four sons, each subscribing for one share. Aron Salomon afterwards had 20,000 shares allotted to him. No one else ever had a share in the company.
By clause 50 of the articles of association, at a general meeting every member was to have one vote for every share held by him; so that Aron Salomon, after the allotment of 20,000 shares, could outvote all the other shareholders. By clause 57 the first directors were to be nominated by a majority of the subscribers to the memorandum of association. By clause 58 the directors were never to be less than three or more than five. By clause 59 the qualification of a director was that he was a shareholder. By clause 60 the remuneration of the directors was to be determined in general meeting. By clause 61 it was provided that the business should be managed by the directors, and that they might exercise all such powers of the company as were not by any Act or by the articles required to be exercised in general meeting. By clause 62 (a) it was provided that “they may borrow any sum or sums of money on such security and upon such terms as to interest or otherwise as they deem fit, and may secure the same by mortgage or other debentures or bonds or by mortgage in any form of the whole or any part of any property, funds, assets, or effects of the company, including uncalled capital: Provided that the directors shall not, without the sanction of a general meeting of the company, borrow any sum of money exceeding 10,000l.”
“(b) They may from time to time appoint any person being a shareholder in the company (whether a member of the board or not) to be managing director or managing directors on such terms as to remuneration or otherwise with such powers and for such period as they deem fit.”
By clause 74 the directors were empowered to determine the quorum of directors, and it was provided that until otherwise fixed the quorum should be three. Questions were to be decided by a majority of votes, and in case of an equality of votes the chairman was to have a casting vote.
On August 2, 1892, the subscribers to the memorandum of association met, and appointed Aron Salomon and two of his sons to be the first directors. The remuneration of the managing director was fixed at 500l. a year, and the remuneration of the other two at 148l. a year each.
On the same August 2 the first meeting of directors was held. Aron Salomon was appointed chairman, and Asher Salomon, one of his sons, secretary. Aron Salomon was appointed managing director, and it was resolved that two directors should form a quorum. It was further resolved that the agreement of July 20, 1892, should be adopted by the company without modification, except that the time for completion should be extended to September 4, 1892. It was further resolved to make payment for the stock-in-trade, the price of which had been fixed by the agreement of July 20, 1892, at 16,000l., as to 6000l. in cash, and as to 10,000l. in debentures of the company of 100l. each. The balance-sheet referred to in the agreement of July 20, 1892, was produced; the bills and book debts mentioned in the agreement were found to stand therein at 6782l. 19s. 7d., and it was resolved that a cheque should be forthwith drawn for that amount in favour of Aron Salomon. It was further resolved that Aron Salomon should be called upon to execute a declaration of trust of the leases, and that upon his execution of it 2500l. cash should be paid to him. It was also resolved to issue seven shares to the seven subscribers to the memorandum of association.
On August 12, 1892, the second meeting of directors was held, and a formal agreement in pursuance of the resolution of the previous meeting, adopting the agreement of July 20, 1892, was sealed on behalf of the company, a counterpart having been previously signed by Aron Salomon, and dated August 2, 1892.
On September 5, 1892, the third meeting of directors was held, at which it was resolved that the seal of the company should be affixed to debentures to be issued to Aron Salomon. It was also resolved that 20,000 shares should be allotted to Aron Salomon, he having applied for them.
At the fourth meeting of directors on January 26, 1893, debentures for 10,000l. were sealed and delivered to Aron Salomon.
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