CH4 + CH5 Corporate Personality + Lifting VEIL PDF

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CHAPTER 4 – LIFTING VEIL OF INCORPORATIONCH3 - CORPORATEPERSONALITY The separate legal status of a registered company, which provides it with an identity that is separate from that of its members, shareholders and employees – it’s own legal capacity EFECTS :  Can sue and be sued  Own property  L...

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CHAPTER 3 – LEGAL PERSONALITY + CHAPTER 4 – LIFTING VEIL OF INCORPORATION CH3 - CORPORATE PERSONALITY  The separate legal status of a registered company, which provides it with an identity that is separate from that of its members, shareholders and employees – it’s own legal capacity EFECTS:  Can sue and be sued  Own property  Liable for debts  Company can be party to contracts  Perpetuity – exist after members die  Allows limited liability of SH Different to limited liability! Advantages  SH can take advantage Disadvantages  Creditors

Salomon v Salomon & Co*  F: formed company. According to Companies Act, need 7 SHs to form a company. Members were Salomon, his wife and 5 children, purchased his own sole trading leather business for £39k (a very high price):  £10k debentures (a long term secured debt over company’s assets) = become a secured creditor of its own company £20k in £1 shares = Salomon own 20 001 shares and the other members 6 shares £9k cash. = Salomon MD, SH and secured creditor. = Salomon had a power of control and a strict liability.  Company went into liquidation, only 1k assets realised and Salomon was owed £10k from company re debenture but there were other unsecured creditors (Mr Broderip).  Liquidator claims company was a scam, Salomon should be liable for debts as company and Salomon were the same person. Salomon should be personally responsible + contest the validity of the transaction. Salomon argues he should be given £1k as priority as owed as a secured creditor.  Trial judge: sole purpose of him incorporating company was to act as an agent to run his business for him – agreed with liquidator  CA Held: agreed with liquidator for different reasons - sham company, principle of limited liability was only a privilege provided by Companies Act for independent shareholders not “one substantial person and 6 dummies” Kay LJ: About the state and the requirement to have 7 shareholders: ‘But they were not intended to legalise a pretended association for the purpose of enabling an individual to carry on his own business with limited liability in the name of joint stock company’ Moralistic point of view. Salomon’s activities pictured as: ‘defeated’, ‘defraud’, ‘perverting’, ‘cheating’, …

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HOL: disagreed and held company had separate personality: debts not the

 Company’s legal personality confirmed as a very strong principle  Assumption that corporate personality was only for mediumlarge companies of 7+ plus members proven wrong  If SH simply hold shares as technicality that’s irrelevant = SH can just hold the shares without further participating to the company  Using debentures opposed to shares is fine Issues left unresolved:  What a company can and can’t do  What separate legal personality means

CHAPTER 3 – LEGAL PERSONALITY + CHAPTER 4 – LIFTING VEIL OF INCORPORATION

- Easy straightforward should spend less time on this q to have more time after Be accurate Concept of legal personality was created in salomon v salomon Apply to the fact don’t need to write a page and half of law Apply the law of each point, drawing an answer, while arguing evoke the principle that will not be used there (show that you master the topic)

mbers: o debenture took priority over other debts due to separate legal entity. o Nature of the shareholding valid. Simply hold a % of the company o Act didn’t state to act ‘bona fides’ = motives of the SH irrelevant 

Lord Herschell “it is to be observed that both courts treated the company as a legal entity distinct from Salomon and the then members who composed it, and, therefore, as a validly constituted corporation” ‘The company is at law a different person altogether from the subscribers’ But HOL didn’t respect Parliament’s will (not use of Hansar yet). The 7 SH’s requirement was created to avoid small businesses to become company.

Jameel v Wall Street Journal Europe SPRL 2006  HOL: confirmed a SH can claim against a company for libel/slander/defamation and equally a company can bring a claim against it’s own shareholder vis a vis Macaura v Northern Assurance Co 1925*  F: Macaura sold timber on his estate, to Irish Canadian Saw Mills Ltd which he had majority shareholding, almost entire company assets were timber which remained on estate to be stored but this was insured under Macaura’s own name. Fire happened, insurance company argued he had no interest in the timber as it was the companies, he argued he was the company as SH and Director  HOL: (1) timber owned by company (2) Macaura had no insurable interest (3) corporate responsibility relates not only to company debts but also assets followed Salomon  Lord Sumner “it is clear that the appellant had no insurable interest in the timber described. It was not his. It belonged to the company” Lord Wrenbury: ‘even if he holds all the shares, he is not the corporation…neither he nor any creditors of the company has any property legal or equitable in the assets of the corporation’ Barings plc (In Liquidation) v Coopers & Lybrand (No.4) 2002

 Corporate personality relates to assets (Macaura) as well as liabilities (Salomon)  Insurance must be in companies name

 Corporate personality

CHAPTER 3 – LEGAL PERSONALITY + CHAPTER 4 – LIFTING VEIL OF INCORPORATION  F: parent company suffered a loss as a result of it’s subsidiary  H: parent can’t claim on behalf of subsidiary as subsidiary is the proper plaintiff Giles v Rhind 2003  Facts: C and D both SH, D terminated employment and sold shares but set-up own business and poached clients against agreement which made other company go into liquidation.  Claim: company claimed but failed due to liquidation so then the claimant claimed for (i) loss of remuneration and benefits resulting from his loss of employment with the company and (ii) loss of his investment in the company as the result of his shares and loan stock being rendered valueless by the failure of the company  Question: whether the claimant was barred from recovering damages because his loss was merely reflective of a loss suffered by the company, which was the only person or entity that could claim.  Trial judge held: the irrecoverability of loss by a shareholder extended to all heads of loss which the company could have claimed but had chosen not to, and included not only loss of dividends on shares and diminution in the value of a shareholding but also all other payments which a shareholder would have received from the company if it had not been deprived of funds, regardless of whether such payments would have been received in the capacity of shareholder or employee – claimant appealed  Held: his claim for loss of remuneration and other benefits was not a claim for reflective loss and therefore he was also entitled to pursue those claims. The appeal would therefore be allowed  Reasoning: the defendant’s breaches and use of confidential information to poach the company’s major customer had caused the claimant’s investment to be seriously damaged, his loan to become irrecoverable and his remuneration and employment to be discontinued as the result of the company’s business being destroyed, the claimant was entitled to pursue his claim that his shares had become valueless and he had lost his loan as a result of the defendant’s actions Shaker v Al-Bedrawi 2003  Facts: claimant and a friend invested in a business and wanted 70% SH, via a

also applies to parent v subsidiary companies  The principle of no reflective loss which barred a shareholder from recovering in respect of loss suffered by the company as the result of a breach of duty owed to it did not apply where the defendant had by his own wrongdoing destroyed or disabled the company so that, by reason of the wrong done to it, it was unable to pursue its claim against the defendant

CHAPTER 3 – LEGAL PERSONALITY + CHAPTER 4 – LIFTING VEIL OF INCORPORATION

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trust, but when this was sold by D he re-invested profits and did not give them their proceeds. He then went bankrupt. Claim: The claimant alleged that B had acted dishonestly, in breach of trust and in breach of fiduciary duty Defence of defendant: The defendants contended, that the claimant was barred from recovering damages because his loss was merely reflective of a loss suffered by a corporate vehicle, either ANA Inc or ANA Ltd, which was the only entity entitled to bring proceedings. Defence of the claimant: the claimant contended that since he and A were never shareholders of ANA Inc or ANA Ltd he had an interest in the business rather than in the shares but in any event to the extent that he had suffered a diminution in the value of a shareholding in ANA Inc, the no reflective loss rule did not apply because B was under a personal duty to him and breach of that duty had caused him personal loss, separate and distinct from any loss which might have been caused to ANA Inc Trial judge held: (i) that the claimant and A had intended to invest in, and receive interests in, corporate vehicles established by B, in particular ANA Inc, (ii) that on the assumption that B had misappropriated the proceeds of sale, that M had taken a $1m bribe, that the purchaser of the business, M and SP had all dishonestly assisted B’s breaches of fiduciary duty and that SP were guilty of deceit and knew or ought to have known that funds received by them had been misappropriated, ANA Inc would have claims for breach of fiduciary duty against B and wholly adequate causes of action in dishonest assistance and knowing receipt against the other defendants, (iii) that B would also have been liable for making unlawful distributions, (iv) that ANA Inc had no distributable reserves and the misappropriation of $6m was an unlawful distribution which was prohibited by Pt VIII of the Companies Act 1985 and ultra vires, (v) that in the absence of being able to establish independent duties in contract, tort or equity owed to him by B the claimant did not have a cause of action against B for the misappropriation of ANA Inc’s assets, (vi) and that since the claimant only had interests in shares he had no cause of action against B for an account or in constructive trust which would enable him to invoke the accessory liability of

CHAPTER 3 – LEGAL PERSONALITY + CHAPTER 4 – LIFTING VEIL OF INCORPORATION the other defendants because the damages were purely reflective of ANA Inc’s loss, and (vii) that his claim against SP for deceit failed because

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it was specifically related to the residue of the $6m and reflected the damage to ANA Inc, and the claims for knowing receipt and knowing assistance were not available to a shareholder where the accessory liability alleged was the liability of a director for breach of duty. Trial judge conclusion: claimant was not entitled to proceed against any of the defendants in relation to the proceeds of sale. Appeal: on a ground not argued before the judge, contending that since B was a trustee of 70% of the shareholding in ANA Inc for the claimant and A he was bound to account to them for 70% of all profits he obtained by use of those shares and therefore the claimant’s action was not that of a shareholder for breach of fiduciary duty in misappropriating a company’s assets or in making an unlawful distribution but a proprietary claim made by a beneficiary under a trust for the profit made by a trustee by the use of trust property consisting of shares in a company. Appeal held: The no reflective loss principle, under which a shareholder was barred from recovering in respect of loss suffered by the company as the result of a breach of duty owed to it, did not preclude a claimant bringing an action as a beneficiary under a trust against a trustee to account for a profit made by him rather than as a shareholder, unless it could be shown by the defendant that the whole of the claimed profit reflected the company’s loss which it could recover by cause of action. A beneficiary having an equitable interest in shares which were held in trust by a director in his capacity as a trustee was entitled to sue the director/trustee for an account of the profit made by him if the beneficiary’s claim extended to moneys lawfully extracted by the director/trustee and in respect of which the company could have no claim against him for breach of fiduciary duty. Accordingly, if it could be shown that the $6m was misappropriated from ANA Inc or unlawfully distributed so that ANA Inc was entitled to the whole of the $6m, the no reflective loss principle would apply to bar the claimant’s action. However, since the no reflective loss principle was an exclusionary rule denying

CHAPTER 3 – LEGAL PERSONALITY + CHAPTER 4 – LIFTING VEIL OF INCORPORATION the claimant what would otherwise be his right to sue, the onus was on the defendants to establish the applicability of the principle and it would not be right to bar the claimant’s action unless the defendants could establish not merely that the company had a claim to recover a loss reflected by the profit, but that such claim was available on the facts. Since that could not be shown without a trial and since it was possible that at least part of the $6m was lawfully taken by B, the claimant was not barred by the no reflective loss principle from proceeding with his claims. Hashem v Shayif 2008  The court was asked to pierce the veil of incorporation of a company in the course of ancillary relief proceedings.  Facts: H had failed to co-operate with the court. After a comprehensive review of all the authorities, Munby J said: ‘The common theme running through all the cases in which the court has been willing to pierce the veil is that the company was being used by its controller in an attempt to immunise himself from liability for some wrongdoing which existed entirely dehors the company. It is therefore necessary to identify the relevant wrongdoing – in Gilford and Jones v Lipman it was a breach of contract which, itself, had nothing to do with the company, in Gencor and Trustor it was a misappropriation of someone else’s money which again, in itself, had nothing to do with the company – before proceeding to demonstrate the wrongful misuse or involvement of the corporate structure. But in the present case there is no anterior or independent wrongdoing. All that the husband is doing, in the circumstances with which he is now faced – the wife’s claim for ancillary relief – is to take advantage, in my judgment legitimately to take advantage, of the existing corporate structure and, if one chooses to put it this way, to take advantage of the principle in Salomon.’ Lee v Lee’s Air Farming 1961*  Lee incorporated Lee’s Air Farming 1961, owned all but 1 share, appointed himself as Governing Director for life, then employed as chief pilot of the company, plane crash and widow claimed compensation under Worker’s Compensation Act  Issue: whether a company can employ SH as employee? Insurance company

 Can use veil to take legitimately take advantage in ancillary relief between married couples

 Because of separate legal personality, a company can employ whoever it wants including it’s own shareholders

CHAPTER 3 – LEGAL PERSONALITY + CHAPTER 4 – LIFTING VEIL OF INCORPORATION claimed that given he owned so much of the company, this would amount to him making a contract with himself.  New Zealand Court of Appeal: not a worker under act  London Privy Council: (1) company and Lee were legal entities an can enter into legal relations with one another – basis of Salomon (2) they had entered a contractual relationship where he was an employee (3) in his role as Governing Director he could give himself orders as chief pilot, alike a master and servant relationship, so did fit definition of worker under the act = widow entitled to compensation  Viscount Simonds “the company and the deceased were separate legal entities” 

Company law’s history

Original logic: Group of humans formed a corporation, and this corporation have a legal personality. - The most successful legal personality was the religious order. The religious order’s assets could be kept even if an Abbot died, the legal personality was not longer dependant on an human being life. The Crown was giving rights to the religious order to be a legal personality in the form of charter or grants. - These charters/grants were ‘incorporating’ the order. Incorporate from the Latin ‘corpus’ = body => create a body - Local authorities and commercial organisations (such as the Guilds of Merchants) become corporations. - Parliament > Crown. The grant had to be confirmed by the Parliament. Then charted could only be granted by Act of Parliament - Stock market crash of the South Sea Bubble – 18th century. Many frauds on the charter/grant document. Government had to intervene.

- Joint Stock Companies Act 1844 - Incorporation by simple registration = A safeguard against Fraud by insisting on full publicity of the companies in the Registrar of Companies. But absence of strict liability principle. The company’s members were liable for the company’s debts. Except for charter and deed of settlement companies = not all the companies equal.

CHAPTER 3 – LEGAL PERSONALITY + CHAPTER 4 – LIFTING VEIL OF INCORPORATION - Remarque: Separate legal personality is different from limited liability. Limited legal liability is the logical consequence from the existence of separate personality. But not interdependent, a company can have a legal personality without limited liability, ex: CA 2006 S3(4)

- Limited Liability Act 1855 included in the Joint Stock Companies Act 1856 - provide limited liability for company: Ltd/Plc = company’s members not liable for company’s debts. Legal personality of the members is different than the legal personality of the company. - simplification of registration requirement for incorporation Since this act company law is no longer designed for large-scale companies but for all sizes businesses. Start of the dvlpmt of company law.

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Asset value ≠ share value. The asset value is a small part of the equation that determines the market price. The SH don’t own any of the company’s property, they are trading a bundle of rights that someone else thinks may grow in value or provide them with income. Most UK stock market company are private company. = Restriction on the sale of the share, either have to 1sr sale to a SH or need the board’s approval. Right to sale share isn’t a common feature. But right to participate to a dividend.

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SH as a collective (traditional view) ≠ Stakeholders theory. - Traditional company law focus on the SH as a collective. Advantages: - encouraging risk of capital – clarity of focus and authority - But many others groups with an interest in the company not included: minority SH (with often legitimate claims), employees, creditors, … - The stakeholder debate/theory tent to include more this group and increase their legitimacy. The recent law reforms attest of it: - CLRSG Final Report - The Company Reform Bill, Part 10, Chap 2-> introduced in the CA 2006 s172

CHAPTER 3 – LEGAL PERSONALITY + CHAPTER 4 – LIFTING VEIL OF INCORPORATION LIFTING VEIL OF INCORPORATION VEIL OF INCORPORATION  Law recognises separation between assets of company and those of it’s members – barrier known as veil VEIL IN-BETWEEN  if shareholders have paid up, no claims can pass through the veil LIFTING VEIL OF INCORPORATION  Where Salomon principle has potential of being abused, perpetrate fraud or other wrongdoing (unjust

EXCEPTIONS TO THE SALOMON PRINCIPLE:1. LEGISLATIVE INTERVENTION  Purpose: limit the Salomon principle where it could be used as an instrument of fraud PARENT COMPANIES Misleading treating parent as separate to subsidiary companies – led to:  S.399 CA 2006 – parent company has duty to produce group accounts  S.409 CA 2006 – parent provide details of shares in subsidiaries + names + country of activities FRAUD - Where a company has been created or managed in or...