Mr Aron Salomon was not a leather boot and shoe manufacturer. His firm was in Whitechapel High Street, with warehouses and a large establishment. He had had it for 30 years and "he might fairly have counted upon retiring with at least £10,000 in his pocket." He had a wife, a daughter and five sons. Four of the sons worked with him. The sons wanted to be partners, so he turned the business into a limited company. The wife and five eldest children became subscribers and two eldest sons also directors. Mr Salomon took 20,001 of the company's 20,007 shares.
The price fixed by the contract was £39,000, which was "extravagent" and not "anything that can be called a business like or reasonable estimate of value." Transfer of the business happened on June 1, 1892. Purchase money for the business was paid, totalling £20,000, to Mr Salomon. £10,000 was paid in debentures to Mr Salomon as well (ie, Salomon gave the company a loan, secured by a charge over the assets of the company). The balance paid went to extinguish the business’ debts (£1000 of which was cash to Salomon).
But soon after Mr Salomon incorporated his business, there was economic trouble. A series of strikes in the shoe industry led the government, Salomon's main customer, to split its contracts between more firms (the Government wanted to diversify its supply base to avoid the risk of its few suppliers being crippled by strikes). His warehouse was full of unsold stock. He and his wife lent the company money. He cancelled his debentures. But the company needed more money, and they sought £5000 from a Mr Edmund Broderip. They gave him a debenture, the loan with 10% interest and secured by a floating charge. But the business still failed, and they could not keep up with the interest payments. In October 1893 Mr Broderip sued to enforce his security. That was the end. The company was put into liquidation. Mr Broderip was paid but other unsecured creditors were not.
The liquidator met Broderip’s claim with a counter claim, joining Salomon as a defendant, that the debentures were invalid for being issued as fraud. The liquidator claimed all the money back that was transferred when the company was started: rescission of the agreement for the business transfer itself, cancellation of the debentures and repayment of the balance of the purchase money.
Court of Appeal
ReplyDeleteThe Court of Appeal [1895] 2 Ch 323 confirmed Vaughan Williams J's decision against Mr Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability, which Parliament had intended only to confer on "independent bona fide shareholders, who had a mind and will of their own and were not mere puppets". Lindley LJ (an expert on partnership law) held that the company was a trustee for Mr Salomon, and as such was bound to indemnify the company's debts. Lopes LJ and Kay LJ variously described the company as a myth and a fiction and said that the incorporation of the business by Mr Salomon had been a mere scheme to enable him to carry on as before but with limited liability.