Company law notes PDF

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1. What is company?A company is legal entity which has been formed in the view to maximise profit. It is the kind of legal entity or corporate body which is brought into being by the registration procedures laid by the companies act 2001.A company can grow by virtue of its profitability, its ability...

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1. What is company? A company is legal entity which has been formed in the view to maximise profit. It is the kind of legal entity or corporate body which is brought into being by the registration procedures laid by the companies act 2001. A company can grow by virtue of its profitability, its ability to raise funds, and the use of those profits and funds to expand the business, perhaps by taking over other profitable companies.

Types of companies • Public and private companies • Unlimited companies • Private limited and public limited companies Public limited • Limited liability • Separate legal entity • Continuity existence • Ease of buying and selling of shares for shareholders - this encourages investment in plc’s • Access to substantial capital sources due to the ability to issue a prospectus to the public and to offer shares for sale. • Risk of takeover due to the availability of shares on the Stock Exchange. • In some cases, the creation of company is not evidenced by the issue of certificate of incorporation by the Registrar of Companies. Private limited • Able to raise capital from sale of shares to family, friends and employees. • Have greater status than an unincorporated business • No rights to issue shares to members of the general public and on stock exchange. • Shareholders have limited liability,(i.e), if the company is wound up, their personal assets will not be seized. • Separate legal personality

Role and duties of Promoter 1. Fiduciary duties 2. Duty of disclosure 3. To disclose the secret profit: The promoter should not make any secret profit. If he has made any secret profit, it is his duty to disclose all the money secretly obtained by way of profit. He is empowered to deduct the reasonable expenses incurred by him. 4. To disclose all the material facts: The promoter should disclose all the material facts. If a promoter contracts to sell the company a property without making a full disclosure, and the property was acquired by him at a time when he stood in a fiduciary position towards the company, the company may either repudiate the sale or affirm the contract and recover the profit made out of it by the promoters.

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5. The promoter must make good to the company what he has obtained as a trustee: A promoters stands in fiduciary position towards the company. It is the duty of the promoter to make good to the company what he has obtained as trustee and not what he may get at any time. 6. Duty to disclose private arrangements: It is the duty of the promoter to disclose all the private arrangement resulting him profit by the promotion of the company. 7. Duty of promoter against the future allottees: When it is said the promoters stand in a fiduciary position towards the company then it does not mean that they stand in such relation only to the company or to the signatories of memorandums of company and they will also stand in this relation to the future allottees of the shares.

Liabilities of Promoter: The liabilities of promoters are given below: 1. Liability to account in profit: As we have already discussed that promoter stands in a fiduciary position to the company. The promoter is liable to account to the company for all secret profits made by him without full disclosure to the company. The company may adopt any one of the following two courses if the promoter fails to disclose the profit. (i)The company can sue the promoter for an amount of profit and recover the same with interest. (ii) The company can rescind the contract and can recover the money paid.

Twycross v Grant (1877) 2 CPD 469 In describing the role and function of a promoter, Lord Cockburn said:! " A promoter, I apprehend, is one who undertakes to form a company with reference to a given project and to set it going, and who undertakes the necessary steps to accomplish that purpose...and so long as the work of formation coninues, those who carry on that work must, I think, retain the character of promoters. Of course, if a governing body, in the shape of directors, has once been formed, and they take what remains to be done in the way of forming the company into their own hands, the functions of the promoter are at an end."

Pre-incorporation contract A pre-Incorporation contract is a contract that is entered into by a person who is acting on behalf of a company that does not exist. The person entering into the agreement has the intention that once the company comes into existence the company is to be bound by the provisions of the preincorporation contract. The only formal requirement for the conclusion of a pre-incorporation contract is that it must be reduced to writing. The Companies Act provides that if the board of directors of the company has neither ratified nor rejected a particular pre-incorporation contract made or done in the name of the company within three months after the date on which the company was incorporated, the company will be regarded as having ratified that agreement. In the event that the company is not incorporated, or if incorporated but refuses to adopt and ratify the agreement, the agent in terms of the Companies Act is jointly and severally liable with any other person for the liabilities created as provided for in the pre-incorporation contract.

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Parties to a contract enter into an agreement with the intention that the end result envisaged is the exchange of something of value usually money, at least in most instances. The same end result is worked towards in a pre-incorporation contract; however the achievement of this result will not be possible if the contract does not make provision for a special clause dealing with the preincorporation aspect.

2.

CORPORATE PERSONALITY

A. The company as a separate legal person, section 26 Section 26:A company incorporated under this Act shall be a body corporate with the name by which it is registered and continues in existence until it is removed from the register of companies. It focuses mostly on a the word ‘person’ that is ‘a subject of rights and duties’. We speak a corporation as a ‘person’ and recognise it’s separate ‘personality’. A company is regarded in law as a person separate and distinct from its members. It makes no difference to this rule that one member owns all or substantially all of the shares. Effects of Corporate Personality: - A company can be a party to a contract - A company can sue or be sued in its own name - A company can have ownership rights - Limitation of liability !

Salomon V Salomon & Co Ltd Facts Aron Salomon was a successful leather merchant who specialized in manufacturing leather boots. For many years he ran his business as a sole proprietor. By 1892, his sons had become interested in taking part in the business. Salomon decided to incorporate his business as a Limited company, Salomon & Co. Ltd. At the time the legal requirement for incorporation was that at least seven persons subscribe as members of a company i.e. as shareholders. The shareholders were Mr. Salomon, his wife, daughter and four sons. Two of his sons became directors; Mr. Salomon himself was managing director. Mr. Salomon owned 20,001 of the company's 20,007 shares - the remaining six were shared individually between the other six shareholders. Mr. Salomon sold his business to the new corporation for almost £39,000, of which £10,000 was a debt to him. He was thus simultaneously the company's principal shareholder and its principal creditor. ISSUE The case concerned claims of certain unsecured creditors in the liquidation process of Salomon Ltd., a company in which Salomon was the majority shareholder, and accordingly, was sought to be made personally liable for the company’s debt. Hence, the issue was whether, regardless of the

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separate legal identity of a company, a shareholder/controller could be held liable for its debt, over and above the capital contribution, so as to expose such member to unlimited personal liability. Decision of the Court at first instance When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud. The judge, Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors It was mentioned the case, ‘in order to form a company limited by shares, the Act requires that a memorandum of association should be signed by the seven persons, who each to take at least one share. If those conditions are complied with, it does not matter if the signatories are relations or strangers. There is nothing in the company Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any one should have substantial interest in the undertaking or they should have a mind or a will of their own, as one of the Lords Justices seems to think, or that there should be anything like a balance of constitution of the company. ‘Mr Salomon appealed but his appeal was dismissed with costs.’ The Court of Appeal also ruled against Mr. Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability, which the Legislature had intended only to confer on "independent bona fide shareholders, who had a mind and will of their own and were not mere puppets". The Lords Justices of Appeal variously described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability. Decision of the House of Lords The House of Lords unanimously overturned this decision, rejecting the arguments from agency and fraud. They held that there was nothing in the Act about whether the subscribers (i.e. the shareholders) should be independent of the majority shareholder. The company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient. The 1862 Act created limited liability companies as legal persons separate and distinct from the shareholders. Lord Halsbury stated that the statute "enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others." The House held: • "Either the limited company was a legal entity or it was not. If it were, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not." The House further noted: • "The company is at law a different person altogether from the [shareholders] ...; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any shape or form, except to the extent and in the manner provided for by the Act."

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B. The corporate veil The rule; limitation of liability The Corporate Veil Theory is a legal concept which separates the identity of the company from its members. Hence, the members are shielded from the !liabilities! arising out of the company’s actions. Corporations exist in part to shield the personal assets of both shareholders and directors from personal liability for the debts or actions of a corporation. Unlike a general partnership or sole proprietorship in which the owner could be held responsible for all the debts of the corporation, a corporation traditionally limited the personal liability of the directors.

Lifting/ Piercing the veil This doctrine is also known as “disregarding corporate entity”. Removing the shield protecting the personal assets of the shareholders from the company‟s creditors, and making them personally liable of the company‟s debts is called the lifting of the corporate veil. The phrase relies on a metaphor of a "veil" that represents the veneer of formalities and dignities that protect a corporation, which can be disregarded at will when the situation warrants looking beyond the "legal fiction" of a corporate person to the reality of other persons or entities who would otherwise be protected by the corporate fiction While lifting the corporate veil, the separate legal personality of the company is ignored as well as the limited liability of the shareholders. while seeking an answer to the questions of whether there is any overriding principle as to when the courts will lift the corporate veil, and if there is, whether these principles are appropriate, we should bear in mind that the separate corporate personality and the limited liability principles are interdependent. The lifting of the corporate veil is considered as one of the legal responses to potential abuse of limited liability. Mainly there are three situations where the veil is lifted by a court: application of the terms of a statute or a contract, or as a matter of common law.

Factors that allows piercing the veil • Absence or inaccuracy of corporate records • Concealment or misrepresentation of members; • Failure to maintain arm’s length relationships with related entities; • Failure to observe corporate formalities interms of behavior and documentation; • Failure to pay dividends; • Intermingling of assets of the corporation and of the shareholder; • Manipulation of assets or liabilities to concentrate the assets or liabilities; • Non-functioning corporate officers and/or directors; Other factors the court finds relevant; • Significant undercapitalisation of the business entity(capitalisation requirements vary based on industry, location, and specific company circumstances); • Siphoning of corporate funds by the dominant shareholder(s); • Treatment by an individual of the assets of corporation as his/her own;

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• Was the corporation being used as a”façade”for dominant shareholder(s) personal dealings; Alter Ego Theory

Case laws relevant to lifting the veil Prest v. Petrodel came before the Supreme Court on appeal from a decision in a divorce case. Michael and Yasmin Prest married in 1993 but the marriage ended in 2008. Mr Prest was a wealthy oil trader who had previously worked for Marc Rich and later went into business on his own account, operating through a number of companies over which he had complete control (the “Companies”). The Companies had legal title to real estate within the UK, including the couple’s matrimonial home. In the divorce proceedings Mrs Prest obtained an order from the family courts requiring her husband to pay her a lump sum of £7.5 million plus annual payments. To satisfy this judgment, the Judge ordered the Companies to transfer title to the marital home and seven other properties. The Judge based this order on Section 24 of the Matrimonial Causes Act which provides that the court may order that “a party to the marriage shall transfer to the other party… such property as may be so specified, being property to which the first-mentioned party is entitled…”. The Judge also decided that the matrimonial home was held by one of the Companies on trust for Mr Prest, who was the beneficial owner of the property. Importantly, the Judge in the High Court recognised that the companies had a separate legal personality from Mr Prest, as they were not being used for an improper purpose, and the Court of Appeal agreed. It is this point that is of significance in a commercial context and is the focus of this article. The first point to be dealt with in Prest was whether English law recognises the concept of piercing the corporate veil at all. Earlier in 2013, the Supreme Court in VTB v. Nutritek heard argument that there is in fact no principle of law which allows a court to disregard the separate legal personality of a company. The Supreme Court in VTB expressed some support for that argument, but held that they did not need to decide the point. In Prest, the majority of the members of the Supreme Court, however, confirmed that the doctrine of piercing the corporate veil is a well-established one. When can a court pierce the corporate veil? In Prest, Lord Sumption attempted to clarify the doctrine as follows: 1. The term “piercing the corporate veil” means disregarding the separate personality of a company and occurs when the court applies an exception to the rule in Saloman v. Saloman. 2. The doctrine can be distinguished from a situation where the law attributes the acts of a company to those individuals who control it, but without disregarding the company’s distinct legal personality. 3. Lord Sumption identified two scenarios where there is some form of wrongdoing which might lead to the person in control of a company being held liable: A. the first is the “concealment principle” which lord sumption considered did not in fact involve piercing the corporate veil. this is where a company or companies are interposed in a transaction so as to mask the true principals to the transaction. in other words, the parties attempt to employ a “façade” to disguise their activities. in such cases, the court does not disregard a company’s separate legal existence, but unveils the true facts which the corporate structure is designed to conceal.

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b. the second is the “evasion principle”. the court may disregard the separate legal personality of a company if there is a legal right against the person in control of the company and the company is deliberately interposed in order that the separate legal personality of the company should defeat the enforcement of that right against the controlling party. the court may then pierce the corporate veil, but only for the purpose of depriving the company or its controller of the advantage they would have obtained by reason of the company’s separate legal personality.

Gilford Motor Co Ltd v Horne [1933] Ch 935 Facts •Mr Horne was a former managing director of Gilford Motor Home Co Ltd (Gilford). •His employment contract prevented him from attempting to solicit Gilford’s customers in the event that Horne left Gilford’s employ. •Horne was fired and he subsequently set up a competing company which undercut Gilford’s prices. •Gilford did not have any legal restraints upon Horne’s company, only Horne himself. •Gilford commenced proceedings against Horne individually, claiming that Horne’s company was an attempt to evade legal obligation (not soliciting customers).

Issues •Had Horne violated his non-compete clause by setting up his competing company?

Held •The English Court of Appeal held that the company was set up to evade Horne’s contractual obligations. •The Court “pierced the corporate veil” and ordered an injunction against Horne. •Courts can “pierce the corporate veil” if a company is simply a mere device to evade legal obligations, though this is only in limited and discrete circumstances.

Quote “I am quite satisfied that this company was formed as a device, a stratagem, in order to mask the effect carrying on of a business of Mr EB Horne. The purpose of it was to enable him, under what is a cloak or sham, to engage in business which, on consideration of the agreement…”

The ‘fraud’ exception: Jones v. Lipman [1962], a company was used as a "façade" (per Russell J.) to defraud the creditors of the defendant. Gencor v. Dalby [2000], the tentative suggestion was made that the corporate veil was being lifted where the company was the "alter ego" of the defendant.

DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] The corporate veil may be pierced where groups of companies can be treated as partners. DHN was the holding company in a group of three companies. There were two subsidiaries, ...