Company Law Condensed Notes PDF

Preview

Summary

Company Law Condensed NotesWorkshop 1 - Different Business ModelsThe Company’s Constitution and IncorporationBusiness ModelsCompany  A company is a separate legal entity (the company owns property, enters into contracts and can sue and be sued in its own name). Profits and losses belong to the comp...

Description

Company Law Condensed Notes Workshop 1 - Different Business Models The Company’s Constitution and Incorporation Business Models Company  A company is a separate legal entity (the company owns property, enters into contracts and can sue and be sued in its own name). Profits and losses belong to the company and not the shareholders, and it is the company that is therefore liable for its own debts.  Limited liability  Governed by the Companies Act 2006 and registered at Companies House Private company  Limited liability  Flexibility to raise finance - no requirement to have any specified minimum amount of share capital  Only needs one director and does not need to have a company secretary  Set up costs and formalities need to be registered, and extensive disclosure obligations  Harder to get outside investment and raise finance Public company  End in Plc  Must have a share capital with a nominal value of at least £50,000  Needs a minimum of two directors and is obliged to have a company secretary  Enables a company to raise greater funds by offering shares to the public at large Sole Trader  Unlimited personal liability  Can be set up without formal structure and regulations and no set up costs Partnership  No procedural requirements, set up costs, and no requirements for publicly filed accounts  Unlimited personal liability  Need a written partnership agreement Limited Liability Partnership  Limited liability  Separate legal entity  Required to file annual accounts and other information, reg at Companies House  Members of an LLP may become personally liable for debts  No flexibility on finance



Every member may take part in management

Incorporating a company Two options for setting up a company  Incorporating a company from scratch  Purchasing a shelf company Summary of incorporating a company from scratch  Under s 9 CA 2006, the following must be delivered to the Registrar of Companies at Companies House for a company to be registered: o a copy of the company’s memorandum; o Articles prescribing regulations for the company (if the company does not intend to use the Model Articles (MA)); o the fee – the required fee for incorporation can be found on the Companies House website.  S 17, no longer requires the memorandum it is a formality  The company becomes a legal entity (s 16(3)) from the date of incorporation set out in the certificate of incorporation (s 15 CA 2006). Purchasing a shelf company  Traditionally cheaper and quicker  However, now you can create a company online. The Company’s Constitution Constitutional Documents  CA 2006 came into force on 1 October 2009. Prior to this, companies were governed by the principles of the Companies Act 1985 (CA 1985).  CA 1985 required companies to have two constitutional documents: the Articles of Association and the Memorandum.  CA 2006 s 17 : the memorandum no longer forms part of the company’s constitution – it is only required as part of the procedure to register. Memorandum  Companies formed under CA 2006 have unrestricted objects (s 31 CA 2006) unless the objects are specifically restricted in the company’s Articles. So the ultra vires rule is not applicable to a 2006 Act company unless it has chosen to insert an objects clause into its Articles.  For older companies that were incorporated under the CA 1985, s 28 CA 2006 provides that any provisions in a memorandum must be treated as provisions of the company’s Articles. This includes the objects clauses included in the memoranda of all CA 1985-incorporated companies. Under CA 2006, therefore, the objects clause of an older company continues in force, operating as a limitation on that company’s capacity unless and until the Articles of that company are amended to remove its objects clause.

Articles of Association  All companies must have articles of association (Articles) (s 18 CA 2006). Under CA 2006, the Articles form the main constitutional document of a company. The purpose of the Articles is to regulate the relationship between the shareholders, the directors and the company.  A company’s Articles must be interpreted in the light of relevant legislation. There is considerable scope for overlap between the procedures set out in CA 2006 and those that may also be contained in the company’s Articles. The Articles must comply with the minimum provisions of CA 2006.  Once a company has adopted Articles, it is able to alter them at any future date by special resolution (s 21(1) CA 2006)  Whatever form the company’s Articles take, therefore, they will be binding on both the company and its members and enforceable.

Workshop 2 – Corporate Personality and lifting the Corporate Veil Corporate Personality Separate legal personality  A company is a legal entity that is distinct from its owners. It has a separate legal personality. It is not the agent of the creators. o E.g. Salomon v A Salomon & Co Ltd [1897]  This means that: o The company owns its own property  E.g. Macaura v Northern Assurance Co [1925] o The company enters into its own contracts and the benefits and liabilities under the contract belong to the company  E.g. Lee v Lee’s Air Farming [1961] o The company sues and is sued on its own liabilities  E.g. Adam v Cape Industries o The company is liable for the debts of the company o A company continues to exist even if its shareholders/directors change  Benefits o Section 74 Insolvency Act 1986 enshrines the concept of limited liability, confirming that the shareholders of a limited company are, generally speaking, not liable to a liquidator in the event of the company's insolvency. o A director is the agent of the company o Key Cases: Salomon v A Salomon & Co ltd Decision (High Court):  Vaughan Williams J: agent-principal analysis (the company was an agent of S) with S being required to indemnify the company for the losses sustained.

Decision (Court of Appeal):  the company as a trustee for S as beneficiary – a trustee improperly brought into existence. Due to the requirements of the legislature not being complied with (ie 7 active members) the company was created for an illegitimate purpose. It must therefore follow that the company did not exist. Decision (House of Lords):  Agency argument is flawed  A company is a different person from its members from incorporation, so it is liable for the debts it incurs. Companies can therefore be validly used by individuals to carry on what is in economic reality the business of an individual.  In absence of fraud, motie of incorporators is irrelevant  The HL takes a literal approach to statute  A company is validly incorporated once the formalities have been complied wit  The shareholders need not have an interest in the business  They also said that the court of appeal was wrong to add words to the original act and a literal reading means that the company was found legitimately  One man companies can have limited liability  The decisions of Vaughan Williams J and Court of Appeal reversed Lee v Lee’s Air Farming Decision (Privy Council)  The Privy Council found that the company and L were distinct legal entities and therefore L under his contract of employment was a 'worker' as defined under the Act. Piercing the Corporate Veil Piercing the Corporate Veil  'Piercing the corporate veil' refers to situations in which the courts may go behind the corporate framework and the company's separate legal personality to make the members or shareholders of a company liable. This is an exception to the fundamental principle in Salomon that shareholders' liability is limited to the amount of their shares.  Piercing the corporate veil is a true exception to the law in Salomon. Common law  The cases in which the court has been requested to allow the lifting of the veil can be categorised as follows: o Façade or sham (the company is a deliberately created façade)  There are a number of cases which have been determined based on this principle.  Gilford Motor Co ltd v Horne  Jones v Lipman [1962] (alternative remedy of specific performance)  Specific performance - A decree by the court to compel a party to perform its contractual obligations. In the High Court, it may

be granted in addition to or instead of damages. Unlike damages which are available as of right, specific performance is granted at the court's discretion.  Trustor AB v Smallbone (No 2) [2001] (lifted the veil) o Single economic entity – it is now established that parent companies are not liable for their subsidiaries other than in specific circumstances.  Adam v Cape Industries Plc [1990]  Chandler v Cape [2012] EWHC Civ 525 o Agency – liability based on law of agency not lifting corporate veil  Although it is possible that the company may act as an agent for its parent company or shareholder and therefore the parent company or shareholder may be found liable on this basis, there is no presumption that this is the case.  Even where liability has been established, the argument in these cases is based on the common law of agency, not the doctrine of lifting the corporate veil.  The House of Lords judgment in Salomon considered and expressly disregarded this ground on the facts of that case. o Tort  Parent companies may be liable to those dealing with their subsidiaries on the basis of tort, but again this is not an example of lifting the corporate veil.  VTB Capital plc v Nutritek International Corp and others [2013] UKSC 5  Adams v Cape Industries PLC [1990] Ch 433  However, in Chandler v Cape plc [2012] EWCA 525 CA, the parent company was held to be liable in tort for asbestos related injuries suffered by the employees of the foreign subsidiary company, since the parent was held to owe a duty of care to the subsidiary's employees through its control over the subsidiary's health and safety policy. Four conditions were needed for such liability  a) both companies were in the same line of business, b) the parent company had much experience in the industry and superior knowledge of health and safety, c) the subsidiary’s system of work was unsafe and the parent company knew this, and d) the parent company ought to have foreseen that the subsidiary and its employees would rely on the parent company’s superior knowledge for protection. Two separate principles in which this was alleged:  Concealment principle o This doesn’t involve piercing the corporate veil. It describes cases where the corporate structure conceals the real actors, where the court will look behind the corporate structure to discover the real facts.  Evasion principle o The court may pierce the corporate veil if a person deliberately attempts to evade an existing legal obligation he is under by interposing a company which he controls. This was the case in Gilford Motor Co Ltd v Horne (1933) Ch 935.





Lord Sumption in Prest v Prestodel concluded that the corporate veil can only be pierced to prevent the abuse of corporate legal personality where someone deliberately frustrates the enforcement of an alternative remedy by putting a company into place. If there is another legal remedy then piercing the corporate veil will not be necessary or available.

Key Cases: Prest v Prestodel Resources Ltd & Others [2013] UKSC 34 First instance (High Court)  Moylan J ruled that piercing was justified by virtue of the Act. Court of Appeal  The court of Appeal allowed an appeal by the companies. As the corporate form needed to be used for an improper use, or it had to be shown that the companies held the properties on trust for Mr Prest. Decision (Supreme Court)  The Supreme Court unanimously overturned the Court of Appeal and held that Mr Prest beneficially owned the assets of the Petrodel Resources Ltd companies under a resulting trust because he contributed to their purchase price. There was no need to pierce the corporate veil, which could only be done in limited situations.  Although H had acted improperly in many ways, his actions had not evaded or frustrated any legal obligation to W, nor had he concealed or evaded the law in relation to the distribution of assets of the marriage upon its dissolution, and accordingly the piercing of the corporate veil could not be justified by reference to the general principle of law, Salomon v Salomon & Co Ltd [1897] A.C. 22  In Prest v Petrodel, the supreme court concluded that, although this was not a case in which the corporate veil should be pierced, the properties were found to be held on trust by the company for the husband ( the principal shareholder) and therefore an order was made for the sale of the property and for the money to be given to the wife.  The Supreme Court in Prest confirmed that piercing the veil may exist as a matter of law but it seems that it would be extremely rare that the principle will be invoked. The Supreme Court reviewed the historic cases where the courts had pierced the veil and stated that in each case, liability could in fact be established under general principles without the need for the corporate veil to be lifted. Adam v Cape Industries  The Court of Appeal here refused to allow the corporate veil to be lifted to allow the judgment to be enforced against the parent company. Judgment could not be brought against Cape.  Note that this case was a leading authority on 'piercing the corporate veil' prior to the 2013 case of Prest v Petrodel.

Workshop 3 – The doctrine of Ultra Vires, pre-incorporation contracts and liability in tort and crime Explore the development of the ultra vires doctrine The Doctrine of Ultra Vires  This is where a body purports to act outside its power.  This doctrine derives from public law.  The doctrine was deemed to apply to registered companies in order to protect creditors and shareholders. The theory was that companies should be restricted in their activities to those which the shareholders and creditors had initially provided money to fund.  Companies were therefore not permitted to act outside of their objects clauses. Acts outside the objects were known as Ultra Vires and were held to be void. o E.g. Re German Date Coffee Co (1882) 20 Ch D 169 Problems resulting from the doctrine of Ultra Vires:  The objects clause was initially not permitted to be altered. Later legislation allowed alteration but only in very limited circumstances until 1991, when amendments made to the Companies Act 1985 came into force.  Registered companies often did diversify and change their business, and this then led to problems. Diversification is often key to businesses to protect for the future.  The doctrine of constructive notice combined with the ultra vires rule caused problems for third parties seeking to enforce contracts against companies.  As a result of these issues and judicial interpretation, companies incorporated from the 1960s onwards but before 1991 (when amendments were made to CA 1985 introducing a new s 3A and s 4) usually had very long objects clauses, setting out in detail all the possible types of business the company may want to engage in. The reason for this was an attempt to avoid the effects of the ultra vires rule and provide the company with sufficient capacity for its trading. o E.g. In the case of Bell Houses Ltd v City Wall Properties Ltd [1966] 2 QB 656  Ordinary trading companies registered between 1991 and 2009 (when the final part of CA 2006 came into force) usually specified in the memorandum that the company was a 'general commercial company'. This was permitted under the provisions of s 3A CA 1985 and meant that the company could carry on any trade or business and had power to do all such things as were incidental or conducive thereto.  Although these wide objects clauses meant that issues of ultra vires were less frequent, cases still came before the courts. o E.g. Re Introductions Ltd v National Provincial Bank [1970] Ch 199 o Following this, there were recommendations for reform of the law in this area to protect third parties, which finally started to take place following the UK joining the European Community in 1973. The First European Community Company Law Harmonisation Directive removed the doctrine of constructive notice where it concerned the memorandum and articles. It also contained a saving provision for ultra vires transactions where the transaction was dealt

with by the directors and the third party was acting in good faith (now incorporated into s 40 CA 2006). The reform of ultra vires  The CA 1985 (further to amendments which came into force in 1991) introduced a number of changes, particularly that the memorandum could be altered by special resolution, allowing companies to change their objects clause (s 4) and also that companies were permitted to have a general objects clause which stated that the company was to carry on business as a 'general commercial company' (s 3A), which allowed the company to carry on any trade or business whatsoever.  Further changes were introduced by CA 2006. Two key changes were: 1. The introduction of a provision in s35 CA 1985 removing the doctrine of constructive notice in relation to a company's memorandum and articles. This remains and is now enshrined ins 39(1) CA 2006 which states as follows: 1. 'The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's constitution.' 2. Finally, in CA 2006 the requirement for an objects clause in the memorandum was completely removed. Section 31 CA 2006 states that the default position is now that all companies have unrestricted objects. A company may still choose to insert a limitation on its capacity in its articles but this is rare. Companies formed prior to CA 2006  In practice you will come across many companies that were incorporated prior to 2009 (when CA 2006 came into force) and therefore were incorporated with an objects clause in the memorandum.  These pre CA 2006 companies objects clauses are treated as if they were a provision of the articles (s 28(1) CA 2006) and will continue to bind the company unless altered by special resolution. If the company adopts new articles then this also treats the objects clause as having been removed. It is therefore still necessary to check the position, but any issues of ultra vires are now rare.  Note that any constitutional restrictions on a company's capacity have no bearing on liability in tort or crime.

Corporate activity and legal liability Contractual liability of a company Capacity: Does the company have actual or deemed capacity?  For CA 2006 companies the answer will be yes (s 31)  For pre CA 2006 companies, check the memorandum and articles to see whether the objects clause restricts the company's capacity to enter into the contract. Authority: Does the agent have actual authority (express or implied)?

 If yes, the contract is binding. If no: Does s 40 CA 2006 remedy the defect and make the contract binding?  If yes, the contract is binding. If no: Does the agent have ostensible authority? (ie has there been a representation by someone with actual authority reasonably relied on by the third party?)  If yes, the contract is binding. If no: Does the rule in Turquand's case assist? Is reliance reasonable?  If yes, the contract is binding. If no: Has the company ratified the act?  If yes, the contract is binding. If no, the contract is NOT binding. Legal liability of directors: Duties  Directors are also under duties to act within their powers (s. 171)  A director must exercise independent judgement (s. 173)  A director may not accept a benefit (e.g. gifts or inducements) from third parties arising from his position as a director or which are intended to induce the director to act in a certain way (s. 176). Liability  A director can expressly assume personal liability by signing a personal guarantee of a company’s obligations  Assume liability by implication – deceit o In the case of Contex Drouzhba Ltd v Wiseman and Anor [2006] EWHC 2708 (QB) a director who signed a contract was held to be making an implied representation about the company‟s solvency to a supplier which he knew to be untrue. The director was liable personally to the supplier for deceit. Learn about the authority of a...