PGDL Company Law Overview PDF

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Company Law crib (This is applying , not academically explaining –i. concise ‘’what is the law’’)Week 2: Legal personality & limited liabilityStep 1: What is legal personality? o A company is a legal entity that is distinct from its owners – the shareholders. It has a separate legal personal...

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Company Law crib (This is applying, not academically explaining – i.e. concise ‘’what is the law’’)

Week 2: Legal personality & limited liability Step 1: What is legal personality? o A company is a legal entity that is distinct from its owners – the shareholders. It has a separate legal personality. Step 2: What is the significance of legal personality? o Limited liability is the logical consequence of the existence of separate personality– this means that shareholders are not liable to pay debts which the company owes to its creditors because it is the obligation of the company to pay its creditors. If a company has insufficient funds to meet its liabilities, creditors cannot pursue their claims against the shareholders. o If their company becomes insolvent, shareholders will be liable to lose the money that they have invested in subscribing for the company’s shares. If applicable, they are also liable to make payment for any shares they have not fully paid for, but that is the extent of their liability. o Section 74 Insolvency Act 1986 – confirms that shareholders of a limited company are, generally speaking, not liable to a liquidator in the event of the company’s insolvency. This means: Shareholders can invest in a company following an assessment of the risks of losing that investment, knowing that the rest of their personal assets are safe & without having to take an active role in management. o Key Case – Saloman v A Saloman & Co Ltd: Saloman transferred his business of boot making, to a company (Saloman Ltd), incorporated by himself. The price of such transfer was paid to Saloman by way of shares, and debentures on the assets of the company. Later, when company went into liquidation, Salomon’s right of recovery against the debentures stood aprior to the claims of the unsecured creditors, who would, this have recovered nothing from liquidation proceeds. To avoid alleged unjust exclusion, liquidator, on behalf of the unsecured creditors, alleged that the company was a sham, essentially an agent of Saloman, and therefore Saloman was personally liable for debt. HoL concluded, on appeal, that a literal interpretation of the Companies Act 1862 should be used and as such the company was validly incorporated and therefore had a separate legal personality – S was neither liable to the Saloman company nor to the creditors of the Saloman company. ****Following this judgement, it is clear that a company is a separate person and not the agent or trustee of its controller. The fact some shareholders may take no part in the management of the company is irrelevant. Companies should therefore be validly used by individuals to carry on what is in economic reality the business of an individual. o Other consequences: o A) Company owns its own property: the property of a company belongs to the company itself and not the shareholders (Macaura v Northern Assurance Co – not able to claim for timber as belonged to the company and not to M, therefore was unable to claim on insurance policy). o B) Company enters into its own contracts: A company enters into contracts on its own behalf and the benefits and liabilities under the contract belong to the company, not to the shareholders or directors. This is true even when contract is between the company and its sole director & shareholder (Lee v Lee’s Air Farming Ltd – L and his company were separate legal entities and therefore L under his contract of employment was a ‘worker’ as defined under the Act). Widow entitled to worker compensation. o C) Company sues and is sued on its own liabilities (Adams v Cape – employees of NAAC contract asbestos and try to sue Cape, its parent company for breach of duty of care. The court of appeal rejected a) Cape and its subsidiaries should be treated as a single economic unity, b) the subsidiaries were used as a façade to conceal the true facts & c) an agency relationship existed between Cape and NAAC.

Legal personality & the Companies Act: Section 16 sets out that a company becomes a body corporate capable of exercising the functions of an incorporated company from the date of incorporation (date on which Register issues certification of incorporation) From this date, company has its own existence and personality. Section 59 and 60 CA 2006 require all company names to contain ‘Ltd’ or ‘Plc.’ o Risk to creditors? Risk being unable to receive monies due to them as the concept prevents them from going behind the corporate structure to seek monies from those controlling the company. Step 3 What is piercing the corporate veil o ‘Piercing’ refers to situations in which the courts may go behind the corporate framework and the company’s separate legal personality to make the shareholders of a company liable. This is an exception to the rule that shareholder’s liability is limited to any unpaid amount on their shares. o Prior to Prest v Petrodel, uncertainty in case law and whether doctrine even existing. Clarified in Petrodel - *The doctrine does exist and can be invoked on public policy grounds but in extremely narrow circumstances when there is no alternative remedy. **Although there are past cases where members have been found liable, all of these can in fact be explained on general legal principles without the need for the corporate veil to be pierced. o Following Petrodel the law is clearer: The courts may pierce the corporate veil only where a person under an existing legal obligation or restriction deliberately evades or frustrates that obligation or restriction by setting up a company. Step 4: What is the Historical development of piercing the cv? o Incoherent but clear looking behind corporate veil has always been very narrow jurisdiction. o Statute pre-Petrodel: Number of instances in which statutes allow members of a company to become liable in certain circumstances. Not examples of piercing, rather of when those behind a company can be treated by statute as liable in specific circumstances: a) Taxation – tax legislation recognises that group structures may need to be treated differently for disclosure and financial reporting purposes e.g. 399 CA 2006 requires parent companies to produce group accounts and s409 requires parent companies to provide details of names of subsidiaries and shares they hold in subsidiary. B) employment C) Corporate insolvency – s 213 – 215 Insolvency Act 1986 provides offences of fraudulent trading and wrongful trading where those involved in a company may in certain circumstances be liable to contribute to the debts of an insolvent company. o Common Law: little inconsistency, but cases in which court has been requested to allow the T o 1. Façade or Sham (The court has lifted the veil in these instances) : Company – a deliberately created façade, then shareholder is liable. (Gilford Motor Co Ltd v Horne former employee who was bound by a restrictive covenant not to solicit customers from his former employers set up a company to do so. Court held company was merely a front or a sham and issued an injunction preventing trading). (Jones v Lipman – L had entered into a contract with J for sale of land, but later changed his mind and did not want to complete sale. Formed company in order to avoid transaction and transferred land to company, claiming he could not comply with the contract as he was no longer owner of land. Court found company was merely a façade and granted order for specific performance). Trustor v Smallbone – S was managing director of T and transferred sums of money to company he owned and controlled. T applied to court to pierce corporate veil and treat receipt by second company as receipt by S on grounds that company had been a sham created to facilitate transfer of money in breach of duty – court found here that company was indeed a sham and device through which the impropriety was conducted and therefore, because of this improper motive, the court could lift veil and find S liable. o 2. Single Economic Entity – it is now established that parent companies are NOT liable for their subsidiaries other than in specific statutory circumstances. Have been arguments, but now clear in case law that single economic entity argument is not a basis for piercing (Woolfson v Strathclyde o

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Regional Council – HoL doubted Denning’s decision in DHN and held that veil of incorporation will be upheld unless it is a sham or façade created specifically for purpose of avoiding liability, thereby confirming that each company in a group is its own distinct entity. 3. Agency (liability based on law of agency is not lifting the 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. Cases will turn on their facts and are based on common law of agency, not doctrine of lifting veil. In the absence of express agreement, it is very difficult to establish liability of the shareholder to the parent on the basis of agency. VTB Capital plc v Nuritek International Corp and others – claimant claimed to have lent a company money on basis of misrepresentations of Nutriek which in fact controlled the company and that once the corporate veil was pierced, the defendants could be seen to have been parties to the contract, on an agency agreement. Argument rejected: court found VTB could claim damages against other defendants on the basis of the tort of fraudulent misrepresentation. *The veil was not pierced in this case because of the existence of the alternative remedy in misrepresentation. 4. Tort- Liability based on tortious activity does NOT lift the corporate veil – However in Chandler v Cape plc, parent company was held to be liable in tort for asbestos related injuries suffered by 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 of health policy. Was held that four conditions needed; 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. Step 5: What established in the seminal case of Prest v Petrodel Case: Family law case concerning distribution of assets on a divorce. The husband wholly owned and controlled a group of companies which owned a number of residential properties, including the matrimonial home. Wife sought an order to transfer the properties to her on the basis that they were held by the companies on trust for her husband. Sumption: concept of piercing the corporate veil refers to a true exception to the law in Saloman, where the court will look behind separate legal personality of a company to hold its shareholders liable. He found there were historically two separate principles in which this was alleged: 1. Concealment principle: 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. 2. Evasion principle: The courts may pierce the corporate veil of a person deliberately attempts to evade an existing legal obligation he is under by interposing a company which he controls. This is the only way in which the corporate veil can pierced – to prevent the abuse of corporate legal personality where someone deliberately frustrates the enforcement of an alternative remedy by putting a company in its place This was the case in Gilford Motor Co Ltd v Horne (1933). *If there is another legal remedy then piercing the corporate veil will not be necessary or available. In Prest there was no impropriety in the company holding the properties for tax purposes so piercing the corporate the corporate veil was not necessary. However, he held that properties were held by the company on trust for husband as beneficiary, so an order was made for the sale of the property and the money to be given to the wife. Result of Prest? The Supreme Court in Prest confirmed that piercing the corporate veil may exist as a matter of law but it seems it would be extremely rare that the principle will be invoked. The Supreme Court reviewed the historic cases where courts had been pierced 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. In summary,

where other routes to infer liability on the shareholders are available, such as tortious liability or the law of trust or agency, which do not ignore the company’s separate legal person, the courts will infer liability on these principles.

Week 3: The doctrine of ultra vires &pre-incorporation contracts u Week 3 – Ultra Vires, Agency and pre-incorporation contracts Most important question here is ‘’in what circumstances are the decisions taken by the persons treated as decisions of the company? When the do the acts of (human) directors or employees bind the (inanimate) company to obligations to third parties, and does the company have the capacity to be bound? Step 1 – Capacity & UV o Here we are asking: does the company have the power to enter into that transaction? o Objects clauses: For 1985 need to check objects clause to check which acts/business the company is empowered to participate it. o If the transaction is outside the company’s powers it is consequently void and unenforceable, even if shareholders try ratify. Problem = companies could not initially alter objects clause so this inhibited diversification. o 2006? Capacity not relevant as memorandum no longer contains an objects clause – under s.31 CA 2006, a company’s objects are unrestricted (subject to articles). Also 39(1) ‘’the validity of an act done by a company shall not be called into question on the grounds of lack of capacity by reason of anything in the company’s constitution.’’ o Pre-2006? Objects clauses are treated as provision of the articles and will continue to bind company unless altered by special resolution. If adopts MA then objects clause removed. Step 2- Agency and authority o Question becomes: If company does have capacity, must ask whether the individual who contracted on the company’s behalf had the authority to do so. If yes, then the transaction is valid, but if not, the transaction is voidable at the instance of the company. o Agent? An agent is appointed by a principle (be it a person or entity) to contract on their behalf. The resulting contract is therefore between the principle and the third party, not the agent who is merely the representative of the former. o Authority? An agent requires the authority that allows him to act on the principal’s behalf – this can be 1. Actual authority – (a) express; (b) implied; or 2. Deemed authority – either at (a) statute or at (b) common law – under the rule of ‘ostensible or apparent authority’ or alternatively the indoor management rule. o Actual Authority: Is authority that the principal has actually conferred to the agent (Freeman v Lockyer) It comprises: 1. Express actual authority: For example, a company’s articles expressly confers to the directors general authority to run the business – MA 3: ‘’Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company. 2. Implied actual authority: This can arise from: (1) appointment to a specific role/position in a company: If a company employee/officer does not have express authority for an act (e.g. from her job description/contract) that a person in her position/trade would ordinarily have the power to undertake, then actual authority can be implied from the nature of her trade/custom i.e. because the act ‘goes with the territory’– Smith v Butler. (2) from a course of dealing: Where for example, a director/officer is not expressly authorised to enter into certain transactions, but the company’s board has continuously acquiesced to her doing so, then actual authority is supplied by this course or pattern of dealing. Hutchinson v Brayhead: despite having no express authority, fact he had entered into similar contracts for many months, notifying the board who invariably acquiesced, meant actual authority was implied from a course of dealing.

Deemed Authority: Alludes to circumstances where an agent has no actual authority, but can still bind the principle. Importance* - third parties acting in good faith are entitled to assume the director’s powers are free of any constitutional limitations (so re directors – is where what they are doing is prohibited by articles//CA – is unconstitutional – e.g., ignoring members’ resolution, shareholders’ agreement. 1. Statute: Section 40 CA 2006: 40(1) provides that ‘’in favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution.’’ Person dealing with the company is s.40(2) (b)(i) ‘’Not bound to enquire as to any limitations on the powers of the directors to bind the company or authorise others to do so, (ii) is presumed to have acted in good faith unless the contrary is proved, and (iii) is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company’s constitution.  Effect? Company cannot avoid unauthorised transactions//being bound by acts of directors by arguing these acts were unconstitutional – applies even when the articles require specific shareholder/approval for particular act. The Threshold for proving ‘bad faith’’ is high. *Ofc, directors can still be sued. 2. Common law – ostensible authority: Actual authority is determined by the relationship between the principal and agent. By contrast, ostensible authority arises from the relationship between the principal and the third party. This turns on how the authority of an agent appears to a third party. In Freeman and Locker: Although not appointed as the managing director, K acted as such and engaged the claimants, a firm of architects and surveyors, to apply for planning permission to develop the estate. Buckhurst Ltd later refused to pay the claimants' fees, arguing that K had no authority to engage them. The Court of Appeal upheld the claim on the basis of ostensible authority. Although K had no actual authority, the board had held K out as the managing director, allowing him to act in this way, and therefore K had ostensible authority to bind the company. 3. Common law – ‘indoor management’ rule (Royal British Bank v Turquand): This is the analogous common law rule to s.40 CA 2006. The rule is that outsiders are entitled to assume that a company’s internal procedures, constitutional or otherwise, have been adhered to by the representative of the company with whom they are transacting business. Note however, that the Turquand principle cannot be relied upon when the outsider has actual notice of the irregularity, or is not acting in good faith (Rolled Steel Ltd v British Steel). So, what is its scope now, given the introduction of s.40? (i) Applies when the procedural irregularities are not constitutional breaches but procedural uncertainties (e.g. execution of documents, regularity of appointments -when it is unclear whether this has been done or not, more informal) (2) Also where is a managing director who has not expressly been appointed. o Ratification: A company is able to ratify acts that are beyond the actual authority of its agents, provided that the act is within the authority of the appropriate organ of the company who are looking to ratify it (the board or the shareholders). Ratification involves passing a resolution to approve the act and agree the company will be bound by it. New Falmouth Resorts v International Hotels: ‘’renders transaction with the company binding on it from the time it was entered into by the agent.’’ Step 3 – Pre-Inco...