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Broderip vs Saloman [1895] 2 Ch. 323

Mr. Saloman was a leather merchant. He had his wife, 1 daughter, and 5 sons and he used to work with his 4 sons. He turned his company into a limited company as his sons wanted to become partners. His wife and 5 children became subscribers of the company and the other 2 sons became directors of the company. Saloman took 20,001 shares of the company out of 20,007 shares. The price which was fixed by the contract was 39000 and was not a reasonable estimate value of a business and was extravagant.

When the transfer of business happened on June 1 1892 the purchase was made by paying 20000 to Saloman and 10000 in debentures to Saloman. The balance was paid to reduce the debts of the company out of which 1000 was with Saloman. But after the incorporation of the company went into trouble. The company need money as they were in economic trouble so, Mr. Salomon transferred his debentures to Mr. Broderip for 5000. Salomon then lent back 5000 back to the company with 10% of interest on it.

Citation: [1895] 2 Ch. 323
Decided On: 1895
Court: High Court, United Kingdom
Judge: Vaughan William J.

This case is prior action case before the very landmark case of Saloman vs Saloman[1].

In the case when Salomon formed an limited company along with his family and memorandum of association was subscribed by him. The price which was fixed by the contract was 39000 and was not a reasonable estimate value of a business and was extravagant. When the transfer of business happened on June 1, 1892 the purchase was made by paying 20000 to Saloman and 10000 in form of debentures to Saloman. The balance was paid to reduce the debts of the company out of which 1000 was kept with Saloman.

A Salomon Ltd, purchased Mr. Salomon business for 39,000 approx. and out of which Aron Salomon alleged the company had 20,000 in return for the 20,001 of the 20,007 shares held by Mr. Salomon. The remaining six shares were respectively held by his family members.

Then, Mr. Salomon further also received a floating security debenture of 10,000 and 9000 balance was owed from the sale which was paid to him in mode of cash.

Mr. Salomon was the managing director of the company. The company was going through the economic trouble and problems. He made his effort to save the company by transferring his debentures[2] to Mr. Edmund Broderip in return for 5000. Salomon then lent 5000 back to the company by charging 10% of interest on it. Despite his efforts, Mr. Salomon failed to save the company from trouble. As a result, the company went into insolvency and an order was made to wind up the company.

The assets of the company were at that time were almost sufficient in order to discharge the debentures, Mr. Broderip, who was a secured creditor and he appointed a receiver and manager in order to enforce his security and as a result he was paid his 5000 which was owed. Nothing was left behind for unsecured creditors as Mr. Salomon aimed to rely on his equitable interest in the debentures and claim for the remaining1000 of the company's assets. Salomon's argued that he should be treated as a secure creditor and should be paid off first and before the unsecure creditors. Those creditors claimed that they should have priority because Mr. Salomon and the company were the same person.

  1. Whether the company and saloman were the same person?
  2. Is Mr. saloman liable to pay to unsecured creditors?

The case was decided in the high court in which the Vaughan William J, held the claim of Broderip valid against Mr. Salomon. According to him, 'Salomon & Co. Ltd' was just Mr. Salomon in another form. The signatories of the MOA[3] of the company were also the family member of Mr. Salomon, hence they were only dummies. Mr. Salomon had full control over the affairs of the company and he should be liable towards all the trading debts before self-payment of his own debentures

However, In Continuation Of This Case Mr Saloman Made An Further Appeal And Court Of Appeal Held That:
the Court of Appeal upheld the decision of Vaughan William J against Mr. Salomon but gave different grounds. According to him Mr. Salomon abused the 'limited liability and incorporation' characteristics of a company. Lindley J further also held that Mr. Salomon is personally liable to indemnify all the debts of his company and Mr. Saloman's intention was clearly to defraud his creditors.

Then, The House Of Lords When The Appeal Was Brought To Them, They Held That:
the House of Lords, they overturned the judgements of the other courts which were the lower courts. All the arguments relating to agency and fraud against Mr. Salomon were rejected. They stated that nowhere it is mentioned in the Companies Act that subscribers of the Memorandum of Association should be independent from majority shareholders. Also 'Salomon & Co. Ltd' was formed after duly fulfilling all the requirements of the law. Lord Halsbury LC stated that the 'Salomon & Co. Ltd' was formed after duly fulfilling all the requirements as stated in company law[4] so it has its own separate identity from the Mr. Salomon.

Concepts Involved In The Case
this case of Salomon v. Salomon gave rise to the doctrines of separate corporate personality and limited liability. These doctrines are now one of fundamental principles of Company Law which are studied in today's modern times.

The separate corporate personality means that the company is a separate legal entity which is different from its owner that is the shareholders[5].this concept was further evolved in the concept of Corporate Veil which means that a shareholder is different from the company and means company will be responsible and liable for all the acts and omissions done on the part of company, but however abuse or misuse is done by member or shareholder in the name of company the corporate veil is lifted to see the real culprit behind the acts.

This doctrine of corporate veil has been uplifted in numerous cases including Saloman vs Saloman and has been used ever since then even today now and is considered one of the crucial elements to decide the liability in company law cases. The doctrine of corporate veil is not a specific rule with certain strict conditions it is rather used in cases by looking into its gravity and nature of such as every case is different by decided its nature the doctrine is applied. However, there are certain grounds on which the corporate veil can be lifted which includes fraud, misconduct, to evade taxes, furnishing false information, in case of holding and subsidiary company etc.

The limited liability means that the shareholders are only liable to pay amount which are due on the part of their subscribed shares. companies can sue or can be sued. This principle works whenever the company is in the course of winding up and is in the stage of insolvency.

This means that the members of a company do not need to use their personal assets for the company to meet the obligations of the company to its creditors on its insolvency or winding up but here such limited liability does not shield the limited company from its liability to pay off its creditors until all of its debts or assets are paid off.

This principle was evolved and held by the House of Lords in the Salomon vs Saloman case in which it was held that where the company as long as the company is not formed with unlawful and malefice motive the company is said to ne lawful when it has fulfilled with all the requirements as per companies act. a limited company has a separate legal personality, and its decisions are made by directors and the other managers who uses the powers as conferred upon to them by the company and the memorandum of association and articles of association, and any abuse of their power will give rise to their personal liability.

Further incorporation of a company is also widely mentioned in this Broderip vs Saloman case by the Vaughan William J. the incorporation of a company is mentioned in section 7 of the companies act providing all the essentials and requirements for incorporation of the company which includes memorandum of association, articles of association, list of all the directors along with their consent in written form which has to submitted, documents which are verified and digitally signed by professional like CA or advocates. After this process and requirements are duly fulfilled the certificate of its incorporation[6] is provided to the company.

Critical Analysis
Broderip vs Saloman is an 1895 case which is a prior action case before he landmarks case of Saloman vs Saloman case. The case involved the Saloman who was the owner of the company and due to his company went into economic trouble needed some money in order to save his company. His company also included his family members which meant that his whole company was under fully his control including all the internal affairs. He transferred debentures which were fully secured to me Broderip for 5000 euros but still the company failed and went into bankruptcy.

Then Mr. Broderip enforced his security to get back his money by hiring a manager and as a result he was successful in getting back his money but other creditors didn't get their money because they were not secured creditors and Saloman relied on his argument that he should be treated as different person than his company for his debentured get paid first because they were secured, creditors argued that they should be paid first because Saloman was already running his business and he was acting as an agent.

But however, Vaughan William J. also held that the Saloman company and him were the same person and he was acting as an agent to the company and all the creditors should be paid off. But in my opinion the main essence of a company is its separate personality and the judgement was not correct as a company is a separate entity which was further overruled by the House of Lords. The house of lords said that all the allegation were wrong on Saloman further it was also held that 'Salomon & Co. Ltd' was formed after completing all the requisites which are required as per the companies act so the company has its own separate entity.

I hereby agree with the decision of house of lords that the Saloman and Saloman company are completely different separate entities and the Saloman as he was the secured debenture holder should be paid off first by looking by the perspective of company, he is a secured creditor not an agent so he should be paid off first then if some assets or money is left with the company then the unsecured creditors will be paid otherwise not. The separate entity principle was also recognized in the case of lee vs lee air farming[7] and the kandoli tea company case[8]. In India the separate entity principle was recognized for State Trading Corporation India v. Commercial Tax Officer[9] case.

The case of Broderip vs Saloman is a prior action case to Saloman vs Saloman so it is linked with this case. The case involved that when his company was in trouble so he transferred some debentures to Mr. Broderip and was paid to him when claimed by him. Then when it was the time pay to other unsecured creditors he relied on his equitable interest on his secured debentured. But the creditors argued they should be paid first because he and his company were the same person

The case when it was earlier for the first time brought in the trial court, Vaughan William J. agreed to the claims made by Mr. Broderip that unsecured creditors that he was acting as an agent and had fraudulent intention. All the unsecured creditors should be paid first not Saloman.

This case also went for an appeal but during appeal the decision of Vaughan William J. was upheld.

When the further appeal went to house of lords the decision of the lower courts was overruled and held that company has its own separate entity. which is till now widely recognized principle in today's times. The doctrine of separate personality and corporate veil was evolved in the Saloman vs Saloman case. These doctrines are applied in case to case depending upon its gravity by the modern courts and has also developed by the courts in different cases.

  1. Salomon v. Salomon & Co. Ltd., [1897] AC 22
  2. Companies Act, 2013, 2(30)
  3. Companies Act, 2013, 4
  4. Companies Act, 2013, 7
  5. Companies Act, 2013, 9
  6. Companies Act, 2013, 7
  7. Lee v. Lee's Air Farming, Ltd., [1960] 3 All ER 420
  8. Kandoli Tea Co. v. Sampson, [1886] 11 AC 114
  9. State Trading Corporation of India Ltd. v. Commercial Tax Officer, [1963] 3 SCR 657

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