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COMPANY LAW REVISION NOTES: Trading Structures: TYPES: -

Sole trader Partnership Private Limited company Public limited company Limited liability partnership

Each of these has its own characteristics relating to: o o o

Liability Ownership and control Accountability and regulation

o

Total liability  No distinction between what belongs to the trader and what belongs to the business.  Debts of the business are personal responsibility of the trader  Creditors can pursue the trader for the full amount Complete control as the only person in the business.  They make the decisions and bear the consequences.  Legally own all the assets since there is no distinction between the business and personal assets. Not registered with the Companies House so little regulation and official accountability.  Not required to file annual accounts or reports (other than income and VAT)

Sole trader

o

o

Partnership – Two or more people go into business together. No formality and a partnership are created by agreement between parties. o

o

o

Partnership Act 1890, Section 1(1)  Partnership is the relation that subsists between persons carrying on a business in common with a view of profit. Partners totally liable.  No distinction between the assets of the partnership and the assets of the individuals.  Can be pursued personally for the debts of the partnership. Partners are accountable to each other and so must agree on decisions affecting the operation of the partnership.  Partners must bear the consequences of decisions.

If one partner makes an error which results in damages each partner is held liable for money owed. No regulation.  Same with sole trader, not required to file reports and accounts with any official regulator. 

o

Private limited company (Ltd) o o

o

o

o

MOST COMMON TRADING STRUCTURE. Created through incorporation with the companies house. The promotors who incorporate the company have the power to draft the company’s memorandum and articles of association and so can shape the structure and direction of the company. Liability is limited since the assets are owned by the company and are entirely separate from those of the owners.  Creditors of the company can only pursue the company’s assets to settle debts, not the personal assets of the owners, who are said to have limited liability. Shareholders own shares which gives them credit to the company and voting rights attached to the shares. These voting rights allow them to vote on the decisions affecting the company.  Difference between ownership (shareholders) and control (directors)  Is possible that all of the shareholders of a small company are also the directors from Companies (Single Member Private Limited Companies) Regulations 1992.  For every share sold, the company transfers control in the form of votes. Lots of regulation and accountability.  Companies are accountable to their shareholders by means of regular meetings and also by means of of a series of registers that the company is required to keep in order to comply with the provisions of the Companies Act 2006:  Register of members s. 113  Register of debenture holders s. 743  Register of Directors s. 162  Register of interests in company shares s. 808  In addition to this, a company is also subject to ‘external accountability’ to the wider public. Supervised by the Registrar of companies.  Registrar of companies does: o Supervision the incorporation and dissolving of limited companies. o Collecting and storing certain information that companies are required to provide under the Companies Act o Making this info public.  Almost every step made by a company involves notifying the registrar. o ESPECIALLY:  Annual Accounts (financial position)

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Confirmation statements (directors and shareholders)

Public limited company (Plc) o

o

o

o

o

Only public limited companies can offer shares for sale to the public.  KEY STATUTE: Companies Act 2006 s. 755  A private company must not offer to the public any securities of the company.  Pubic companies can therefore raise capital by advertising shares to the public for sale.  PLCs must have min capital of £50,000 from CA 2006 s. 763 Separate corporate personality so barrier of liability between the assets of public companies and shareholders.  Can only pursue the assets of the company, not individual shareholders. Unlike private companies – public companies have thousands of shareholders and so the difference between ownership (shareholders) and control (directors) is more pronounced. Public companies have more burden of accountability than private companies, primarily from the CA 2006.  Less freedom to the directors of public companies and requires more info to be disclosed. Justified by the disparity between number of shareholders to directors so fear of misinfo from directors needs to be controlled. Listed companies on the stock exchange must meet the rules and requirements from the SE. In return for the disclosure of the extra info companies are allowed access to the markets on the SE.

Limited liability partnership (LLP) -

Recently made via the Limited Liability Partnerships act 2000  Must be registered with the Companies House, is a separate legal entity and confers a form of limited liability on its members. o Partners are able to limit their liability for general trading debts similar to trading plc  NOT able to restrict personal liability for their own negligence. o Ownership is with the partners both individually and collectively. o Must submit annual reports but no requirement for companies directors report.

Incorporation: A limited company does not exist in law until it has been incorporated. KEY STATUTE: CA 2006 s. 7 -

A company is formed under the act by subscribing to the articles of association and complying with the requirements of the act.

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This must comply with the CA 2006. 9 and Small business, enterprise and employment Act 2015.

Naming the company: -

Cannot name the company, under CA 2006 s. 53, anything that would be offensive or constitute an offence. o E.g. ‘Prostitutes Ltd’ rejected in Attorney-General v Lindi St Claire 1981

Changing the status of the Company: Businesses can change the type of company after registration e.g from private to public limited companies. -

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Private to public re-registration is in CA 2006 s. 90 and the principle requirement is that the members of the company approve the change by means of a special resolution (3/4 majority of votes cast). Public to listed – Must go through the FSA and the Financial services and Markets Act 2000 o The FSA must approve the transition and must be accompanied by a sponsor financial institution for the applicant company.

Limited liability and Corporate Personality:

Limited Liability: In limited companies (Private and Public) the assets of the owners and the business are entirely separate, thereby protecting the personal assets of the owners from the claims of the company’s creditors – Insolvency Act 1986 s74 (no contribution exceeding the amount unpaid in shares) -

This means that only the money the shareholders can be pursued for is the amount unpaid on any shares that have been bought ‘partly paid’.

The incentive of Limited Liability: -

Means that entrepreneurs can form companies safe in the knowledge that, if the company fails, their personal assets will be secure. This means company creditors and customers bear the losses. o Therefore, owners can walk out, and set up a second company on the same premise. Called ‘Phoenix Companies’. There is concern that these types of company are too easy to form due to limited liability and can lead to fraud (Griffiths 2006).

CORPORATE PERSONALITY: For the company to be able to own its assets it must have a legal capacity separate from its owners. This is known as corporate personality.

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.

Salomon v Salomon & Co. Ltd (1987) FACTS: -

Salomon made boots as a sole trader and decided to register the company as a limited company. Majority of shares held by Salomon, with one share each held by six other family members. Then sold his business to the company. This was paid for by the company paying cash to Salomon and his family and by a secured debenture (debt) of £10,000 to Salomon personally. When the company failed, the liquidators argued that the debenture (which would take priority over the other debts) was invalid as Salomon and the company were effectively one and the same. o They argued the debenture represented a debt to himself, which was impossible in law.

LEGAL PRINCIPLE: The HoL held that the debenture still took priority over the other debts of the company because it was a separate legal entity, completely distinct from its members. Therefore, it could owe money to its members and, accordingly, the debenture in favour of Salomon was valid. -

Lord Herschell: o “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.”

EFFECTS: -

The company has limited liability. The company can sue and be sued in its own right. The company can be a party to contracts (e.g. Buy and sell goods and to employ staff) The company can continue to function after the death of a shareholder.

Positive effects of corporate personality are based on the conferral of contractual capacity on the company by the act of incorporation. This enables the company to hire and fire, buy and sell, and act as the principal in a principal-agent relationship.

Other cases where the separate corporate personality was shown: -

Macaura v Northern Assurance Co (1925) o Mac sold all the timber on his estate to a company he owned. However, he insured the timber in his own name.  The timber burnt in a fire – the insurance company claimed the wood wasn’t insured by the company and so not liable to pay.

Courts held this as mac insured under his name yet the wood was owned wholly by the company which was separate from him. Lee v Lees’ Air Farming Ltd (1961) o Lee owned all but one of the company’s shares and was a director. He was killed in a work related incident and the insurers refused to pay as they claimed he cannot be an employee of the company. Since he owned all the shares it would be a contract with himself.  Courts held NO > as the company was a separate entity re Salomon, there was nothing to prevent the company from hiring Lee. Therefore, the estate was entitled compensation.  Viscount Simonds: o “The company and the deceased were separate legal entities”. 

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Lifting the Veil of Incorporation: Instances where the courts lift the veil of incorporation and hold members personally liable for debts of the company. These are exceptions to the general rule in Salomon and are in statute and common law. There are two features to all the recognised exceptions: -

They are designed to prevent the protection of limited liability being abused to perpetrate fraud or other wrongdoing They will only apply to members of the company who actually created the situation i.e Directos.

Include statutory exceptions such as ‘pre-incorporation’ contracts and disqualified directors. Fraudulent Trading: When the company has been created or managed to commit fraud – leads to the courts lifting the veil to prosecute directors. KEY STATUTE: Insolvency Act s. 213 -

The court on application of the liquidator may declare that any persons who were knowingly parties to fraud are to be liable to make such contributions to the company’s assets the court thinks proper.

KEY CASE: Patrick Lyon Ltd (1933) Facts: -

Director carried on the business and delayed liquidation of the company for six months after the issue of certain debentures to himself in order to deprive the unsecured creditors of the company the right to challenge the debentures under CA 1929 S. 266.

Legal principle: -

Moral blame on the directors for defrauding creditors of their money.

Wrongful Trading: KEY STATUTE: Insolvency Act 1986 S.214 The court may declare that the person is to be liable to make contributions to the company’s assets if it thinks proper. KEY CASE: Produce Marketing Consortium Ltd. 1989 Facts: -

Directors continued to trade despite being insolvent in the hopes of returning to profits.

Legal principle: -

Despite the intentions being honest the actions were fraudulent. Therefore ordered to add to the company’s debts. Knox: o “no fraudulent intent is not of itself a reason for fixing the amount at a low figure”.

Common Law Exceptions: -

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Sham or façade companies: o Courts are prepared to lift the veil if the company has been used to hide a dishonest purpose. o Gilford Motor Co 1933:  Man was under an NDA so set up a company and used it to communicate to clients.  Courts held that the company was not a genuine business but rather a façade to hide his intention to break the NDA. o Farwell:  “Company formed as a device to mask.” o Jones v Lipman 1962:  Man transferred land to a company he owned to get out of a sale.  Courts held that the company was a façade. o Russel:  “Company used to avoid recognition by the eye of equity”. Separation between personal and corporate assets: o Prest v Petrodel Resources 2013  Divorced wife wanted property from the husband which had been transferred to companies he owned and controlled.  Courts could not justify piercing the veil because the properties were moved to avoid taxes not the wifes potential claims.  However, the properties would be transferred to the wife because the companies had held the properties under a trust for the husband resulting in ownership. o Sumption:

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“family jurisdiction are entitled to be sceptical about the sham to conceal the reality of the husbands beneficial ownership”.

Groups of Companies: o Holding companies can set up subsidiary companies and take advantage of limited liability. Reduces risk by having a separate corporate personality from holding to subsidiary. o Some circumstances have led to the courts piercing the veil between holding and subsidiary companies. o Single economic unit:  Factors determining:  Degree of control from the parent company over actions of the sub.  Complete ownership of all the shares by the parent company. o Development through key cases of groups of companies:  The Albazero (1977) -- Strict  Ownership of Oil on a ship transferred from parent to subsidiary, ship sank, parent tried to claim. o Courts held that the subsidiary is a separate legal entity  Roskill:  “Even though the ultimate benefit would be to the same person”.  Smith, Stone & Knight v Birmingham Corp (1939) -- More Liberal  SSK parent owned a subsidiary but subsidiary was totally controlled by the parent. Council tried to take the land occupied by subsidiary, parent sued for disruption. o Court said NOT a separate legal entity since the actions of the subsidiary were not operating on its own behalf but rather on behalf of the parent.  Atkinson:  “The real occupiers” – true ownership claim.  DHN food v Tower Hamlets (1976) – Liberal Single economic Unit  DHN Parent, owned two subsidiaries. Council tried to take the land owned by subsidiary – sued for disruption but by which company? o Courts held acting as a partnership in action and so not a separate legal entity as all regarded as ‘single economic units’.  Denning:  “Group is virtually the same as a partnership.” “Not defeated by technicality.”  Became less popular over time  Adams v Cape Industries (1990)  Cape owned subsidiaries that sold asbestos in the UK and US. US company sued but had already disposed of assets, so action brought onto the UK parent o Courts said NO. Parent has separate legal identity not a single economic unit since each subsidiary was serving a different purpose.

Slade:  “No reason the parent should be treated as present” since subsidiary was acting alone. Chandler v Cape Plc (2012)  Cape appealed a decision that it had assumed responsibility for protecting employees of its subsidiary from asbestos. o Courts dismissed the appeal. o No automatic assumption of parental responsibility but the company had acted in a manner that created a direct duty to the subsidiary’s employees.  Duty exists if:  Business activities of both are the same  Parent has superior knowledge  Subsidiary work was unsafe and parent knew  Could have foreseen the reliance on parent by subsidiary.  Arden:  “Cape superior knowledge imposed a duty of care to advise its subsidiary”. 

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Liability of Companies in Tort and Criminal Law: The extent a company can be held in tort or criminal law? Companies can be fined but if the offence is imprisonable corporate personality is less helpful. An offense where mens rea must be established mental state is important and companies don’t think. Vicarious Liability: -

Company is liable under vicarious liability for negligent actions on behalf of their employees. More complex when knowledge of circumstance is required – here mens rea is needed.

Decisions of those exercising the ‘directing mind and will’ of the company are liable. The person acts as the alter ego of the company. -

Decisions of the person are viewed as decisions of the company. Person must be sufficiently senior to meet the criteria of directing mind. KEY CASE: o Tesco v Nattrass (1971) – Established Identification theory.  Tesco sold washing powder at price higher than advertised – violating s.24 of the Trade Descriptions Act 1968.  Argued that the manager was a separate person and his servants must take the blame.  Courts said YES – Not senior enough and the responsibility fell not onto the manager as he was not the ‘controlling mind’.  Identification theory is that the decisions of directors can be attributed to the company itself. o Tesco v Brent (1993)

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14 year old boy purchased an 18 film at tesco. Tesco argued that the ‘directing mind and will’ of the company had no knowledge and couldn’t be prosecuted – only the employee who sold.  Courts said YES – Not the directing mind and so company not liable  Staughten: o “statute would be wholly ineffective in larger companies”  i.e. When they have lots of employees.

Corporate Manslaughter Act 2007: No issue for companies to pay fines – but some cases have seen death resulting in manslaughter charges against the company. Courts need to find if it arose from the actions of the ‘controlling mind and will’ of the company. Corporate manslaughter Act 2007 reformed the law since cases had led to the inefficacy of prosecution from deaths. -

Section 1 of the 2007 Act considers broader questions of management systems employed by companies. First successful case was R v Cotswold Geotech 2011

Pre-Incorporation Contracts: An exception to the rule of Salomon where Pre-Incorporation contracts find defendants personally liable for the company’s debts. Pre-Incorporation Contracts: Incorporation leads to the creating of a legal entity separate from its members. Company can then make contracts in its own name e.g. workers or sales. What happens if the contract is made before the incorporation? o This happens when the promoters enter into a contract in the company’s name with a 3rd party believing (mistake...