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Separate Legal Personality - Coggle Diagram
Separate Legal Personality
Background
Cornerstone of company law i.e. that a company has a separate legal personality (SLP) in law.
There are 2 main areas here:
(i) incorporation (advantages and disadvantages) of a co;
(ii) when SLP will be disregarded.
These concepts are intertwined as SLP is an advantage of incorporating.
Why incorporate?
Separate legal personality
• The Salomon rule: a ‘natural person’ is someone like you and me, living and breathing. A company is a metaphysical being, an abstract concept and is regarded at law as a ‘legal person’. Upon incorporation, a co becomes a body corporate or a legal person distinct from its shareholders and controllers. This is the fundamental rule of company law and is often called the ‘rule’ or ‘principle’ in Salomon v Salomon.
• Consequences of the Salomon rule:
o Creditors have no claims against the shareholders, the co being separate and liable for its own losses.
o The co is not the agent or trustee of its shareholders.
o The co may sue and be sued for civil or criminal offences.
o The co can enter into contracts and hold property in its own name.
• Exception to the Salomon rule: see below at ‘lifting the veil’.
• Case law demonstrating the Salomon principle:
Salomon v Salomon
Landmark HOL, establishes SLP principle and is cornerstone of company (UK)
law. Co is separate to its shareholders and a legal person created on incorporation. The co is not the agent of the subscribers or a trustee for them. Do not go behind the veil of incorporation except in certain exceptional circumstances.
O’Neill v Ryan (IRL)
Shares are merely a right to participate in the company. Where compensation is paid for a loss suffered by the co, the shareholders are therefore not entitled to this payment.
Lees v Lees Air Farming (AUS)
Wife of deceased majority shareholder sought compensation as an employee of the company. Rejected. On appeal, allowed, as despite the level of control the deceased had over the co, it is a SLP.
Sweeney v Duggan (IRL)
Endorsed Salomon. Work injury due to inadequate health and safety. Director was liable for injury but only in negligence.
Quigley Meats v Hurley (IRL)
Quigley sought to make natural persons behind d co liable for bills unpaid by the d co. Rejected on basis of SLP.
Limited liability
• Principle that a member’s liability is limited up to the amount unpaid on the share they hold in the co if the co is wound up (that’s why it’s called ‘limited by liability’ as opposed to ‘unlimited liability’ where the shareholders ARE held accountable on an unlimited basis).
• Limited liability is a rule created by statute (applicable rules are prescribed by the Companies Act 2014 (Act).
Tax concessions
• Corporation tax is just 12.5% on this small island. Think about how much you pay in income tax!
Succession
• Until it is struck off the register, a company will live on.
• In a partnership (a non-incorporated entity like a club or association which is only the sun of the parts i.e. individual partners), the consent of all partners is required to terminate the partnership. With a sole trader, the business dies with the named proprietor.
Floating Charges
• When a co needs finance, it doesn’t want all its assets tied up as security for the loan and to ask for creditor consent every time, they need to use a charged asset (like a forklift).
• This type of charge allows the co to deal with its charged assets in the day-to-day running of its business without creditor consent. We natural people cannot create floating charges!
The above are all advantages of incorporation. If you are asked disadvantages: think of the cap on the number of shareholders (149 for a CLS, unlimited for a DAC); the corporate governance and filing requirements with the CRO; the accounting and auditing requirements and the need for a registered office in Ireland as well as at least one director and secretary.
Lifting the corporate veil
• What is lifting the corporate veil?
Atlas Maritime Co SA (UK): to treat the rights and liabilities of the co as the rights and liabilities of the shareholders for some legal purpose.
• Why are you lifting the corporate veil (i.e. disregarding SLP)?
If the co is regarded as a sham; to expose the shared responsibility between controllers and company; and in a group co scenario (holding co and wholly owned subsidiary): one identity.
• Context (how) of lifting the veil?
(i) case law;
(ii) legislation and
(iii) through an agreement by the co and another entity (either legal or natural through agency, guarantees and indemnities.
Fraud or avoidance of legal duty
Jones v Lipman (UK)
P sought specific performance of a contract for sale of a house, against D. D sold house to a co-owned and controlled by him. Co was not a SLP but a “device and a sham.” In absence of fraud, illegality or impropriety, courts will not look behind the corporate veil.
Gilford Motor Co (UK)
D’s contract of employment forbade him from entering into direct competition with p if the employment contract was terminated. D set up a competing co. SLP of the co was set aside.
Roundabout Tavern v Beirne (UK)
Trade Union Act UK: pub closed and fired staff as did not want unionised staff. New co set up with non-union barmen acting as directors. Therefore, not employees, and new co not a party to the employment dispute. Each co is “a legal person”.
Battle v Irish Art Promotion Centre (IRL)
P was a majority shareholder of the company involved in legal proceedings and p wanted to represent the co. Ct disallowed this stating that a limited co cannot be represented in ct by its directors, only by a solicitor, subject to the discretion of the ct to hear other persons on behalf of the co under exceptional circumstances.
Agency
Tyre & Public co v Llewellin (UK)
US co formed a sub in the UK to manufacture and sell its tyres in the EU. Distributors sent orders to the subsidiary without any consultation with the US co. Sub after deducting its manufacturing expenses, forwarded the balance to the US co. Most of the directors of the company resided in the UK and managed the subsidiary’s affairs free from day-to-day control by US co. US co was carrying on business in UK through its UK sub “acting as its agent” and therefore liable to pay UK taxes.
Re FG (Films) Ltd (UK) Cts are willing to lift the corporate veil when fairness and justice required. P was prohibited from enjoying benefits given by UK government as film was not made by the co, it was simply a sham of the p.
Smith, Stone & Knight v Birmingham Corp (UK)
6 factors (not of universal application) applied here. Sub was treated like a department and all profits went to the parent without a declaration of a dividend. Following factors must be present to disregard SLP of sub:
(i) are profits of the subsidiary treated as the profits of the parent?
(ii) were the directors appointed by the parent?
(iii) was the parent the “head and brains” of the sub?
(iv) did the parent govern the sub?
(v) were profits made by the skill and direction of the parent?
(vi) was the sub in the effective and constant control of the parent?
Fyffes v DCC plc (IRL)
Salomon is still law. Cts will not allow the privilege of incorporation to be used for fraudulent, illegal or improper use. Where there is misuse of this privilege, ct may infer an agency or trust to prevent tax evasion. A group may be considered a SLP when to do otherwise would be unjust to those outside the group. Ct can look at the person behind the co to determine the character and residence of the co. Modern view is to look at the substance of the transaction rather than the description of parties. Subs may be found to be agents based on a full factual assessment and an identification of the acts of the agents. Express agency agreement is not necessary if the nature of the parent’s interests and relations between the co’s implies an agency relationship.
Single Economic Entity (SEE)
Power Supermarkets Limited v Crumlin Investments (D1) and Dunnes Stores (D2) (IRL)
P was a tenant operating a supermarket in a shopping centre (SC) where D1 was landlord. The lease contained a covenant that D1 would not permit a competing large supermarket within the SC. Later, D1 sold its interest to Cornelscourt SC (CSC), a member of the Dunnes Stores (DS) group. DS wished to establish its own outlet in the SC and set up a separate co called Dunnes Stores (Crumlin) Limited (D2) with CSC as the controlling shareholder. D2 caused D1 to sell a large unit in the SC to this new co, set up in direct competition with P. P obtained an injunction restraining D2 from trading in the SC. D2 found to be bound by the terms of the lease even though they had not formally been a party to it on the basis that the d’s and SC were part of a SEE. If the justice of the case so requires, ct may treat 2 or more related companies as a SEE so that the business notionally carried on by one will be treated as the business of the group.
Woolfson Strathclyde Regional Council (UK)
Moved away from the concept of SEE; SLP will only be disregarded in cases where the group is merely a facade to conceal some wrongdoing.
Adams v Cape Industries (UK)
Refusal to disregard SLP of a group of cos under common ownership and control although one co occasionally paid the debts of the other and received invoices on behalf of the other.
DCC v Fyffes (IRL)
James Flavin (JF) was a director of DCC. DCC was a parent co of Lotus Green (LG). LG owned shares in Fyffes and sold these at a major profit. Fyffes alleged that JF had insider knowledge i.e. a co cannot sell shares if the insiders (e.g. directors) are in possession of price sensitive information. To succeed, P had to show that the group was a SEE so that the knowledge of JF could be imputed to the group at large. SEE remains a valid argument in Irl and an exception to SLP even though there was some doubt expressed in this and other Irish cases (Allied Irish Coal, Rex Pet Foods).
Re Fredrick Inns (IRL)
Common group liability (e.g. tax) will only occur when a court can discover agency principles, side-lined however when recognised by ct as a SEE.
Human characteristics
DeBeers Consolidated Mines v Howe (UK)
Place of residency of the directors may be relevant. Where the co controlled from: head and brains test.
John Hood (UK)
Power of shareholders to remove a director indicated where control was
LEGISLATION
Company Law
Section 49
Failure to state the co’s name correctly.
Section 210
Unreasonable declaration of solvency.
Section 247 In wind up and directors have made loans under Section 239 which materially contributed to the insolvency of the co, those directors can be made personally liable for the debts of the co.
Section 293
A group of cos is formed when there is a parent or holding co who wholly owns (100% shareholder) a sub (Sections 7 and 8). A holding company is obliged to prepare group financial statements relating to all cos in the group.
Sections 599
Contribution order on wind up.
Section 600 Pooling order for other related cos (Section 2(10)) to contribute towards liabilities of the insolvent co in a wind up.
Section 859
A director held accountable for breaches: restriction/disqualification.
Section 1010
Personal liability for trading as a PLC without a certificate to commence trading from the CRO.
Other legislation
Safety, Health & Welfare at Work Acts and Competition Acts
DPP v Roseberry Construction:
co and director fined for death of an employee (health and safety acts).
Director and co are “basically the same thing”.
The company may be “a creation of the director’s but is created with the express purpose of being a separate entity”.