SLP Problem Question - Sample only for tutorial PDF

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Q 2 2008 Zone A Part BBrian is owed £50,000 by Quark Limited, Quark has refused to pay the money owed giving no reason and so Brian had initiated a court action to recover the sum. Random Limited the parent company of Quark Limited has recently been advised by its tax advisor that it could reduce ta...

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Q 2 2008 Zone A Part B Brian is owed £50,000 by Quark Limited, Quark has refused to pay the money owed giving no reason and so Brian had initiated a court action to recover the sum. Random Limited the parent company of Quark Limited has recently been advised by its tax advisor that it could reduce tax liability for the year 2007/2008 by removing all the assets from Quark Limited and closing it down. Random has decided to follow the advice of its tax advisor leaving nothing in reserve to defend the court action or to pay money owed. Discuss the implication of this decision for Brian

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Discuss Salomon v Salomon ( SLP ) that Quark Limited (Subsidiary is a separate entity compared to its parent Random Plc) As seen in Adams v Cape and Multinational Gas & Petrochemical Ltd v Multinational Gas & Petrochemical Services Ltd. S 251 CA 2006 – Definition of Co-Director Following the reasoning of Adams V Cape.

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If Brian wanted to get the sum of £50,000 from Quark Limited, since the parent company has removed of all Quark Limited’s assets for tax reasons closing it down. Brian cannot sue the subsidiary , Brian has to bring an action against the parent company instead.(Random Plc) The problem is that the case of Salomon v Salomon Brian is unable to sue the parent company. SLP extends to multinational companies, the parent company and the subsidiary company are separate entities. The parent companies is able to hide behind the cooperate veil. SVS extends to MNC as the case of Adams v Cape and Multinational Gas & Petrochemical Co Ltd v Multinational Gas.

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S 251 CA 2006 – Shadow Director Argue that Random Limited ( Parent) had direct control of the subsidiary. Defense would be that Subsidiary Company had no liquidation problem, it did not go bankrupt. However the act of parent co shutting down its subsidiary to minimize tax liability demonstrates control. Courts should allow judicial veil lifting Adams v Cape 1996 COA – Single economic entity, Day to day control, Mere Façade OTF there is no need to look at single economic entity as there is no statute that needs to be construed here. But the day to day control ( parent company had the authority to shut down the subsidiary company to minimize tax demonstrates control) An extended argument could be shutting down the company for reasons of façade. It can be said that the subsidiary was created to absorb risky ventures.

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LJ Slade in Adams v Cape “ Whilst the actions were immoral, there is nothing illegal of it” Contrast the above in Jones v Lipman ( Mr Lipman agreed to sell a piece of land to Mr Jones , however Mr Lipman changed his mind and incorporated a company and sold that land to the company and relied upon the defense of SLP) But the courts refered to this as a mere facede and allowed for judicial veil lifting. To make a comparison here Mr Lipman too did something illegal but the exception did not apply here. But to follow the black letters of the law “ It is immoral and not illegal “ Random Plc ( Parent) is not liable here , so Brian would be unable to obtain the said sum for Random Plc.

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A counter argument is the case of Creasly v Brecchwood Motors Limited 1993 Here Mr Creasly was wrongfully dismissed he brought an action against the company ( Welwelyn) subsequently the company stopped trading and transferred all assets to Breachwood Limited which took over Welwelyn Ltd’s business, in doing so they paid of Welwelyn Ltd’s creditors except for Creasly judgment’s debt. A year later the company Welwelyn ltd was struck of the register and Mr Creasly applied to substitute the Defendant( Welwelyn) to Breachwood motors( This means Breachwood Motors is to pay the judgment debt) Breachwood Motors appealed against it, but was not allowed as the courts held that it was a mere sham by Welwelyn Ltd to evade the JD. The courts allowed the Defendants to be substituted to enforce the judgment Ord v Bellhaven Pubs 1998 Bellhaven Pubs was reorganized due to a breach of financial crisis as it had insufficient funds to pay its judgment debts. The COA held the act of restructuring the company to keep the company afloat and not evade liability is fine. So in this case the corporate veil can be lifted of, as there is no sham. But a mere reorganization to keep the company afloat. To contrast this with our facts Random Plc had shut down Quark Limited ( Its subsidiary with the sole intention of minimizing its tax liabilities and it was not to keep the company afloat) This defense may not apply.

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Kensington v Congo 2006 If there is a dishonest intention between related companies to avoid existing liabilities of a sham. In such cases the courts would lift the corporate veil. The same principle is applied in Raja v Von Hoogsraten2006. Otf Random Ltd decided to shut down its subsidiary down (Quark Limited) to minimize tax liability. This amounts to dishonest intention and the corporate veil should be lifted off. “PT Muchilinski (Holding Multinationals to account) the principle in Salomon v Salomon should not be applicable for parent subsidiary companies. SVS only extends to single individuals, how can this be extended to multinational companies? On the facts Random Limited is the parent company, they should be liable at start, by following the above authority even the principle in Adams v Cape is redundant

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The decision in Adams v Cape allows the concept of separate legal personality to be extended to Multinational companies, this allows for “ sharp practice” ( the deliberate intention of parent companies creating subsidiary companies to absorb risky ventures?

S 213/S 214 IA 1986 -

S 213 IA 86 If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.

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The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper. Morphites v Bernasconi [2001]

OTF, if we can establish that Random had closed down its subsidiary with an intention to defraud the creditor, then we are able to hold Random responsible. -

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S 214(1) IA 1986 - The court, on the application of the liquidator, may declare that that person is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper. This subsection applies in relation to a person if— (a)the company has gone into insolvent liquidation, (b)at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and (c)that person was a director of the company at that time Re Produce Marketing Consortium(1999) OTF if we are able to establish that the parent company had knowledge of the company(subsidiary) going insolvent but did little to save it, then we can hold the parent to be responsible.

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The courts should lift the corporate veil, as there was dishonest intention in the part of the parent company It is evident that the parent company was trying to evade liability. However there is no concrete evidence to establish that the parent company had a negative intention – S 214 IA 86- Safer option...