Unlocking chapter 3 Summary PDF

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Unlocking Chapter 3 Summary...

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Unlocking chapter 3 The company as a distinct legal person The registered company as a corporation S15(1) of 2006: registered companies become incorporated and separate legal persons on registration. S16(2): The members pf registered company are and that the members who may vary over time. What is a corporation? A legal person is a being or entity with the capacity both to enjoy, acquire enforceable legal rights or property; and be or become subject to, enforceable legal obligations and liabilities. Legal person falls into 2 categories, natural persons and artificial or juristic person. All artificial persons are corporations. Corporations fall into 2 categories, corporation sole and corporation aggregate. Former are limited by law to one member at given time and are often attached as an incident of an office. In business we’re not concern with the former but the latter. Latter may (but need not) have more than one member at any given time. The consequences of incorporation/SLP Incorporation: the process by which a legal entity, separate from its owners and managers is formed. Company because it is a corporation is a person in law separate from all of the individuals involved in the company. Company have the capacity of acquiring legal rights or property and become subject to enforceable legal obligations and liabilities. LL: a concept distinct from SLP -

If company incurs debts, those debts are owed by company to the creditor/lender. Not even the owners/shs of company are liable to pay any sum owed by the company. Any legal action to recover debt must be brought by creditor naming the company as defendant. Limited company: Liability of members to contribute to the company to enable it to pay its debts is limited by shares or guarantee.

Limited and unlimited company Owners of registered companies do not necessarily limit their liability to contribute sums to the company so that the company can pay the sums it owes to 3rd parties: LL is an option available to incorporators of registered company. It is possible to register private company under unlimited liability, s3(4). Shareholder payments to a company that is trading As long company continues trade, it has no legal right to require sh with fully paid-up shares to pay any further sum of money into the company, whether limited or unlimited. The power to make call for sh to pay unpaid shares, ordinarily given to the directors. Sh payments to a company that is being wound up Winding up: liquidation of a company. S74 of Insolvency Act 1986. It is essential to distinguish limited and unlimited in this part. A sh is required to contribute to the assets of company sufficient to enable the company to pay its creditors and meet its other liabilities. However, even in relation to unlimited company, member is not liable to contribute to debts or liabilities incurred by company after he has ceased to be a member and also not being a member for a year or more at time of winding up. -

S74 specific provisions for company limited by shares. Whether private or public, liability of sh to contribute to company to enable it to pay debts and other liabilities are limited. The limit is the amount unpaid on the shares, a sh is under no further obligation to contribute.

Justifications for LL Shs of the first registered companies did not have LL. The key benefits of LL are: (1) Encouragement of investment by members of the public in companies. (2) Facilitation of the transferability of shares. (3) Clarity and certainty as to the assets available to creditors of the company. Case: Salomon v A Salomon & Co Ltd (1897). Illustrating concept of SLP. It is carried by liquidator on behalf of unsecured creditors of a company that had become insolvent very soon after being registered under the companies act 1862. It confirmed ability of a sole trader to transfer his business into a registered company and thereby insulate himself from the liabilities of business. At first instance, the COA indicate as the 19th century was drawing to a close, it was not widely understood that sole trader owners of small businesses can use the act to secure LL and insulate their personal property from business risks. Facts: S owned and ran a profitable boot and shoe manufacturing business as a sole trader. He wished to run his business through limited company and selling his business to that company. The statute governing company registration at that time require 7 subscribers

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to the MOA. S satisfied this requirement by his wife and 5 children. Initial nominal share capital is 40k and was divided into 40k shares with nominal value of 1 each. 7 shares were issued, which made initial issued share capital of company 7. The first directors were appointed by shs and were S and his 2 eldest sons. The business was sold to the company at an overvalue. Immediately after transfer the profitability of business began to decline. Company is in debt and unable to pay, S cancelled his loan note, the debenture and company entered into loan arrangements/debentures with Mr B who became a secured creditor of company. Company failed to pay interest on the loan when it fell due and B exercised his right as a secure creditor, to have a receiver appointed. Company’s assets were sold by liquidator to realise cash to pay both secured and unsecured creditors of company. Secured creditors are entitled to be paid before unsecured. Proceeds of sale were insufficient to pay secured creditor B in full. Liquidator brought up action against B and S alleging loan notes issued by company were fraudulent and invalid. Liquidator was successful at first instance at COA but appealed to HOL. Held: S had done nothing wrong, was not liable for the debts of company, and loans between him and company the B and company were valid.

The first instance and court of appeal decisions

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First instance, judge decided fraud was not established on facts. He did, use the agency principles to decide that the company was S’s agent on that basis he ordered S the principal to indemnify the company, the agent for the debts the company had incurred as his agent. COA rejected agency argument. Lindley LJ preferred to hold company was trustee of S who was the beneficiary and described the company as ‘a trustee improperly brought into existence by him to enable him to do what the statute prohibits’, therefore, S must indemnify the company. Lopes LJ regarded family members/shs as ‘dummies’, he said act required ‘seven independent bona fide members, who had a mind and a will of their own’. ‘The transaction is a device to apply the machinery of 1862 to a state of things never contemplated by the act, an ingenious device to obtain protections, in my judgement in a way inconsistent with opposed to its policy and provisions’. He ordered business to be set aside as a sale by S to himself with none of the incidents of a sale but being a fiction.

The HOL decision Dismissing claims of liquidators, members of HOL totally disagreed with decisions of first instance. Lord MacNaghten: The company is not in law the agent of subscribers or trustee, nor the members are liable in any shape or form, except to the extent and in the manner provided by the Act. Kahn Freund: Privileges of incorporation or LL were originally granted in order to enable number of capitalists to embark upon risky adventures without liability. The rigidity to which Kahn referred is clearly evidence in the recent Prest v Petrodel Resources. SLP and insurance Insurance company have avoided paying out under insurance contracts which they have received premiums, based on the insured property being owned by the party insuring it but rather than the company itself. Macaura. Case: Macaura v Northern Assurance Co (1925). -

After selling his property to a company in return for shares, M the sole sh of Irish Canadian Sawmills Ltd, insured the timber against fire in his own name. Timber was destroyed by fire and M claimed on the insurance policy. Held: Property belonged to company not sh. Even though the timber is destroyed by an insured event, M had no insurable interest in the timber as he stood in no ‘legal or equitable relation’ to it and so could not recover under the insurance policy.

Limits on the implications of incorporation/SLP Main legal consequences of SLP of company, ways which these consequences may be supplement and curtailed, to provide a person whose legal remedy against a company is worthless with a legal remedy against another person. Remedies against others may arise from selfhelp action, application of agency, tort equitable principle, statutory provisions or courts ignoring the SLP of company. Self-help action to mitigate the consequences of incorporation Being a person separate from shs, by putting appropriate contractual arrangements in place and taking particular care when drafting contracts. This behaviour is called ‘self-help’. Contractual arrangements Agent: person with authority to alter the legal position of another person which other person is known as the principal. Creditor should have insisted that sh guarantee the obligations of company under any loan between the creditor and company, such guarantees are very common in the context of corporate groups, when they are called “parent guarantees”. They are also very common in the context of sole member or closely held companies. Ex-employer could protect itself by appropriate language in contract of employment. -

A person seeking to do business with company may decide the company is an unacceptable party which to contract with the sh/parent company. Negotiations may take place directly with sh/parent company. As an alternative to negotiating with sh/parent company, and whilst there’s no presumption of agency of company and sh/parent company.

Agency principles Where agency relationship is intended, clear evidence will usually exist but where the sh and company did not intend an agency rs to exist, 3rd party may still occur better remedy than he otherwise has available to him by convincing court that sufficient evidence exists to support finding of an agency rs between company and its sh/controller. Ex post facto, creditor may argue when it entered into the loan agreement, Company acted as agent of sh/parent company. If this argument succeed, sh/parent company as principal is the party to loan/contract, not company, and creditor can sue sh/parent company. Such argument rarely going to be successful, especially where there’s no more than 1 sh. Agency does not override or undermine slp of company. It must be separated to play the role of agent. Agency was used as a step-in argument to impose liability on the indirect owner of a company in Yukong Lines ltd of Korea v Rendsburg Investments Corporation of Liberia (1998), which failed. Case: Yukong case. Korean shipping company negotiated with Marcan to enter into a charterparty. M is agent of R, a Liberian company, and parties to charterparty were Y and R. Before ship delivered to Y, assets were moved out of R and R repudiated the charterparty. Y found itself with a right to sue company, R had no money to pay damages. Y argued that Mr Yamvrias a director of M and indirect owner of both M and R was the undisclosed principal of R. If proved Yam would be correct party to charterparty and Y could sue Yam for damages. Held: Yam controlled R and ultimate beneficial interest in both R and M companies rested with him and members of his family. Yam had

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caused assets of R to be moved out of company to put those assets beyond reach of Y. Yam signed charterparty expressly as agent of R. Yam did not enter into charterparty as undisclosed principal of R, there’s no evidence. Movement of funds out of R was not enough to treat Yam as party. Y must look to Insolvency laws to protect itself to be contingent judgement creditor of an insolvent company. Subsidiary company: another company known as its holding or parent company. Although, Y unsuccessful, The Rialto No.2 illustrates how unintended agency may provide claimant with a remedy against a sh of company. Case: Adams v Cape 1990, 3 subsidiary companies active in US were agents of their English parent company, Cape....