Company Law Lecture 1 - Seperate Legal Personality PDF

Preview

Summary

Download Company Law Lecture 1 - Seperate Legal Personality PDF

Description

Company Law Lecture 1 -Concerned with so called ‘Registered company limited by shares’ -What is the meaning of company? ‘Artificial legal person(Abstract legal concept, not related to tangible reality, legal fiction) that is recognised by the law as having a distinct (apart from those ‘behind’ it) legal existence, with its own rights and obligations.' -Interpretation Act 1978, s.5(unless contrary intention appears in statute)then, sch.1 – ‘person’ includes a body of persons corporate Contrary intention example: DPP v Dziurzynski [2002] – Court decided person was not intended to cover a company Burrell v Hobby Lobby Stores (US) – A corporation can have religious views Law of Property Act 1925, s.61 – unless context otherwise requires.... ‘person’ includes a corporation’

-Perpetual existence (until liquidation/winding up) – company has continual existence unlike an actual person. -The registered company: Created by process of registration under Companies Act 2006 Why create a company? –Enables a group of persons to ‘associate’ and to undertake activities that require dealings with third parties more efficiently. (There are alternatives such as partnerships. Also historically this was done under a trust, deed of Settlement Company) -Registering a company: Companies Act 2006, part 2 s.7-16 - s.7(1)A company is formed under this Act by one or more persons – (a)

subscribing their names to a memo of association (see section 8) and

(b)

complying with the requirements of this Act as to registration (see ss.9-11)

-Subscribers, members, shareholders -Memorandum of Association is a document whereby the subscribers agree to associate and form the company –Articles of Association(s.18(1)) are the core constitutional documents of a company, they determine how the company will operate/be run. Model articles are set in s.20. Facilitative nature of company law -s.12 requires a company to have at least one director, they have fiduciary duties. There are two ‘organs’ of company. 1. The members in General Meeting (GM) and the Board of Directors (Board) -Power generally lies with the Board but in the articles it will show when the GM can come in. The relationship between the Board and members is determined by the articles. Companies Act 1948 – stated that 50% majority of GM could dismiss the Board

-Members and Directors can be the same for example when only a few subscribers. For Plc there can be a separation between management and members for larger company. -Share and Loan Capital: -Where does the company’s initial assets or capital come from? Two sources: 1.Share capital – initially contributed by subscribers in exchange for a share in the company, reflective of their contribution and subsequently contributed by new shareholders. CA 2006 s.10(2), shares must have a nominal/par value, this value can be anything(stays the same and bears no relation to the actual value). Enables you to always work out the proportion that each shareholders has. ‘Partly paid up shares/calls on shares’ 



Shareholders have rights in the company which are determined by the Articles. These usually include: -Right to vote in GM –Right to profits(dividends per share). Although this is determined by the articles, can be for Directors to recommend dividend to GM. –Right to capital (on transfer of share or liquidation) Shareholders are sometimes called owners of the company however, legally they do not. Short v Treasury Commissioners [1948] – Evershed MR ‘Shareholders are not, in the eyes of the law, part owners of the undertaking’. Definition of a share: Borland’s Bank v Steel Brothers – Farwell J ‘A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, ….the contract contained in the articles of association is one of the original incidents of the share’

2. Loan capital is loaned to the company. -‘Debenture’ is a document which evidences a loan to a company -The rights of the creditors are determined by the loan contract. Creditor only has rights against the company: JH Rayner Ltd v Department of Trade and Industry Ors (1987), VTB Capital Plc v Nutritek Intern [2013]. Position of creditor is more certain than shareholder, not depended on how the company does. -On insolvency: Creditors can only look to the company for payment. Originally there is right of recourse against members. Insolvency Act 1986, s.74 – ‘When a company is would up, every present and past member is liable to contribute to the assets to any amount sufficient for payment of its debts and liabilities…’ However: IA 1986 s.74(2)(d) - in the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member’ Company limited by shares: s.3(1) and (2) -Company Limited by guarantee: s.3(1) (3), Agreed amount to be paid on liquidation, so their liability is limited to that amount. Unlimited Company: s. 3(1) (4) Note: All companies have unlimited liability in the sense that they are liable to a full extent of their debts. It is the liability or the shareholders/members to contribute to the assets of the insolvent company that may be limited.

Summary: The ‘Trinity’ of players: shareholders, directors, creditors. The Risks generated that company law ‘manages’: 1. Creditor’s transactional insecurity and liquidation risk resulting from separate legal personality and limited liability. 2. Shareholders agency cost/risk, risk that the agent (directors in this case) won’t look after your interests but his own. 3. Minority shareholder ‘oppression’ risk resulting from majority rule in collective decisionmaking

Salomon’s Case: Broderip v Salomon [1895] (Ch.D & CA) – A Salomon was successful shoemaker, he was soletrader, his son who worked for him wanted share in his business. He registered his company under CA 1862, under this there was minimum of 7 subscribers required. His other children became subscribers so he had 7. Salomon and 2 oldest sons became directors, each subscriber got a share with nominal value £1. Salomon sold his business to the company, he valued business at £39,000, this was an over-value but HL accepted this was because he thought it was worth more. He got back 20,000 shares, the other £19,000 was lent by him to the business and a debenture was written. This loan was secured by a charge on the assets of the company. -He still had a lot of business debts as sole trader, £19,000 was used to pay off these debts -Soon after the business began to lose money,the company needed to borrow more money from Broderip so he became a creditor. Salomon cancelled his debenture so that Broderip could have a secured charge so he was a secured creditor. Broderip later perditioned for the liquidation of the company, and got paid as his interest was secured. The company had no assets after paying Broderip. Salomon still had some personal assets and other creditors wanted him to pay them. The question was whether Salomon was liable to contribute. -Salomon was also a (secured) creditor of the company and wanted to get his money back from the company ahead of the other creditors Held: At first instance that Salomon was liable to contribute to the company’s asset as it was Mr Salomon’s business, the company was Salomon’s agent in carrying out his business. Court of Appeal: Held Mr Salomon liable but disapproved of agency analysis. Although said the company was created for illegitimate purpose to shield Salomon from liability, found that there was a trust and Salomon was beneficiary. LJ Lopes accepted the trustee argument and thought this was a misuse of the Company’s Act.

Salomon v A Salomon [1897] AC 22 (HL) – Reversed Court of Appeal decision, Salomon had complied with Company’s Act and there was nothing on the facts to suggest the company was agent or a trustee. Once the company is legally incorporated it must be treated like any other person, the motivation for the company was irrelevant. -Wide view: confirms separate legal status of company –Narrow view: confirms robustness of limited liability principle

Applications of Salomon: The assets of a company belong to it and not to its members. Neither a member nor creditor has an insurable interest in the assets of the company Macaura v Northern Assurance Company [1925] – Marcuara sold the whole of the timber on an estate he owned to a company, Irish Canadian Sawmills Ltd, in consideration of the allotment to him 42000 fully paid £1 shares. All the company’s shares were held by Macuara and his nominees, and he was also an unsecured creditor of the company for an amount of £19,000. Following the sale, he effected insurance policies in his own name with the respondent insurance company and others, covering the timber against fire. Two weeks later, almost all of the timber was destroyed in a fire. A claim brought by Macuara on the policies was disallowed on the ground that he had no insurable interest in the timber. The timber was not his it belonged to the company and he had no lien or security over it. Lee v Lee’s Air Farming [1961](Privy Council) – Lee, the appellant’s late husband, had formed the respondent company to carry on his business of spreading fertilisers on farmland from the air. He held 2,999 of its 3000 shares, and was by its articles appointed sole governing director and employed at a salary as its chief pilot. He was killed in an aircraft crash while flying for the company. If he was a ‘worker’ then his widow was entitled to be paid compensation by his employer under Workers Comensation Act. The company, as not be required by statute, was insured against liability to pay its workers such compensation. Mrs Lee appealed successfully against the CA ruling that Lee could be a worker when he was in effect also the employer. –A company may make a valid and effective contract with one of its members. It is possible for a person be at the same time wholly in control of a company (as its principal shareholder or member and its sole director) and an employee of that company. Tunstall v Stegmann [1962] VTB Capital Plc v Nutritek [2013] Prest v Petrodel Resources [2013] UKSC – Divorcing parties were litigating over the division of an estate worth more than £50 million, but held by nominee companies, a majority of the Court of Appeal held that an order in respect of a company’s property could not be made in

favour of the wife under the Matrimonial Causes Act, even though the husband owned 100% of the shares and had complete control of the companies, unless there were legitimate grounds for piercing the corporate veil. Mere ownership and control of the shares was not of itself grounds for this.

The corporate ‘group’ context: A company can own shares in another company. Definitions of ‘subsidiary company’ and ‘wholly owned subsidiary’, ‘holding company’ CA 2006 ss. 1159-1160 & sch.7. For purposes of accounting provisions of the Act.

Gramophone & Typewrite v Stanley (CA) [1908] – concerned a wholly owned subsidiary company in Germany, owned by English company. German company made profits and parent company got dividends from this. Parent conceded that they had to pay tax on the dividends, but English tax authority wanted to tax on all the profits of the German company not just the dividends. Turned on whether the business was English company’s business or German company’s business. CA held that it was the German company’s business as it was a separate legal entity, all the parent company was is a shareholder in that company.

Company Law Lecture 2

Lifting the Corporate veil: Prest v Petrodel Resources [2013] case – Matrimonial property dispute. IF one spouse is entitled to property then in a divorce then the court can award the property to another. The husband was the sole shareholder of a number of offshore companies and they had significant assets. On divorce his ex wife claimed some of those assets. The issue was whether the husband as shareholder was entitled to those assets for this purpose. He argued he was not entitled as they were owned by the company and not him. -Wife argued he was entitled Held: it did not fall within the evasion principle. The husband was not under any existing liability to his wife which he set up the company to evade. However the wife won on the point of concealment, he was beneficially entitled to the company’s assets as they were held on trust for him. -Court criticised the term ‘piercing the corporate veil’ as it is used to mean a number of different things. Lord Sumption said this means ‘disregarding the separate personality of the company’

‘Concealment principle’ – Lord Sumption: ‘looks behind the company to discover the facts which the corporate structure is concealing’. –Not disregarding the company When will the court actually ‘pierce the veil’? The ‘evasion principle’: Sumption par .35: Only happens when the evasion principle operates.

'I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality.' -Must be existing liability, contrast with future. Not an abuse to create a company and then cause liability ' It is not an abuse to cause a legal liability to be incurred by the company in the first place. It is not an abuse to rely upon the fact (if it is a fact) that a liability is not the controller's because it is the company's. On the contrary, that is what incorporation is all about.' -Evasion principle is limited, should only be invoked if it is ‘necessary’. Court has no carte blanche to lift/pierce veil in other case even ‘where justice requires’.

Adams v Cape[1990]:

per Slade LJ ‘We do not accept as a matter of law that the court is entitled to lift the veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company.’

VTB Capital

The Evasion Principle – Cases(Identified in Prest): Gilford Motor v Horne (CA) [1933] – Claimant employed defendant as managing director. Horne contract of employment has restriction clause, he could not solicit customers if he left. He set up his own company and he was appointed director, and it operated a competing business to Gilford Motor company. They went for an injunction against Horne and the company. -Horne was under an existing legal restriction (contractual) -He sought to evade that restriction by setting up the company -CA granted the injunction against Horne and the company. Held: The Company was formed as a device, a cloak or sham to mask. Court pierced the corporate veil Jones v Lipman [1962]: Lipman was under a contractual obligation to convey land to Jones. Lipman then changed his mind so he set up a company and conveyed the land to the company, hoping that Jones would not then get an order of Specific performance. -Specific performance was ordered against both Lipman and the Company (on the basis of the evasion principle). -The company was set up for Lipman to get out of his existing obligation to convey the land to Jones Wood v Baker [2015] EWHC 2536 (ch) – Baker had been made bankrupt. Under IA, the trustee in bankruptcy is allowed to serve a notice on the bankrupt that he transfers property that he has acquired after the bankruptcy. Baker carried on business and put the money through companies and sought to evade his obligation under the IA. Court held: The companies had been interposed, so as to enable Baker to evade or frustrate his existing legal obligation to hand over his acquired property. They pierced the corporate veil. Issued a freezing injunction

The Concealment Principle – Cases

Prest v Petrodel Gilford Motor v Horne and Jones v Lipman (examples of concealment as far as the injunction/specific performance were issued against the individuals). –The company exists but if you look behind the company you find that it is being used by Horne in carrying on the business. – Similarly Gencor ACP v Dalby [2000] – Wasn’t a true veil piercing case but rather concealment. –Dalby had been director of company and a third party paid him a bribe and he suggested that the bribe be paid to a company he owned and controlled (Burnstead) . The question was, can the claimant company (Gencor) claim that secret profit. -The company was the ‘alter ego’ through which Dalby enjoyed secret profits. -Looks like they treated as a piercing case but Prest says it was in fact a concealment case. Company was liable to account because it knew it was receiving secret profits. Although could be argued to be evasion cases as Dalby looked to evade his existing fiduciary duties Trustor AB v Smallbone and other (no.2) [2001] –

Attribution cases (subset of concealment) -Daimler Co v Continental Tyre & Rubber – A so-called enemy alien(someone who voluntarily resides or trades with the enemy), cannot invoke the courts in a time of war. The respondent company (Continent) had carried on business in the UK but wanted to sue the appellant for debts but this had arose during the first world war. Continent was incorporated in England but all but one share was resident in Germany and the directors were in Germany. The appellant company said that Continental was an enemy alien and could not sue them. -CA held that the company was not an enemy alien but was an English company, identity of shareholders and directors was irrelevant. -HL reversed CA decision. Conceded company was a separate legal entity and that it was not the agent of its shareholders but that does not mean you cannot look at the shareholders to see its characteristics for these purposes. HL test was who controls the company, if it is controlled by enemy alien then the company is enemy alien. De Beers Consolidated Mines v Howe (HL) [1906]

Groups: ‘Single Economic Unit’ Adams v Cape Industries [1990] – Concerned a complex group of companies. Cape was the holding company and was an English company. Issue was whether these English companies were present in the U.S. This depended on whether they carried out business themselves there. Argument that the group should be regarded as a single unit but defendant argued they were all separate legal entities.

Per Slade LJ:

‘There is no general principle that all companies in a group are to be regarded as one, On the contrary, the fundamental principle is that ‘each company in a group of companies (a relatively modern concept) is a separate legal entity possessed of separate rights and liabilities.’ ‘we do not accept as a matter of law that the court is entitled to lift he corporate veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability in respect of particular future activities of the group will fall on another member of the group rather than the defendant company.’ But, Slade LJ said that the 'single unit' argument can operate where issue turns on interpretation of: ‘the wording of a particular statute or contract’ Interpretation of statute: DHN Food Distributors v Tower Hamlets [1976] – Claim for compensation under a compulsory purchase of land statute. If a ‘person’ carried on a business on the land, then he got compensation not only for the price of the land but also for the disturbance of the business. -There were 3 companies with common shareholding and directors. -DHN carried ...