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Topic 2: Corporate power and personality - Coggle Diagram
Topic 2: Corporate power and personality
Separate legal personality
S.16(1)(a) CA 2006:
A company comes int existence as a body corporate at the beginning of the day on which it was registered
Basically the right from the beginning of the day of incorporation, the company as a SEPARATE LEGAL ENTITY comes into existence
Key Parties
Director:
They run day to day things on behalf of the shareholders
Includes any person occupying the position of director, by whatever name called' (S.250 CA 2006)
Test of function NOT name (statutory directors different from managers)
Shareholders can decide on who should be appointed (Model Art 17)
And removed (S.168 CA 2006)
Shareholder/Member/Owner
Has a stake in the company
Share = measure of interest
They have voting rights, do big decision-making roles
Employee:
Run the company, do the work thats needed to run the company
They don't make the big decisions like a director does
May have separate service agreement with the company
Saloman v Saloman [1897]:
There are 3 points to understand to comprehend the judgement and the case generally:
What is the priority of the creditors?
What is agency?
What is a trust?
Which creditors get paid first:
Creditors
- someone who lends another money
Secured:
Property interest created by law/agreement over assets to secure performance of obligation such as mortgage, fixed charge
Bank takes security over house when lending (mortgage)
Floating charge
- what assets are left over that we can get our hands on
Unsecured creditors
Shareholders
- when assets are sold/liquidated, they own a proportion of whatever is left over in accordance with how many shares they have left)
Agency:
It's a type of fiduciary relationship
It is all to do with the granting of binding power
A principal gives another person (human or company) power to act in their own name
This person is known as an Agent
The agent can therefore do things such as
enter into
binding contracts on behalf of the Principal
Trust:
Division of property into legal and beneficial ownership
Beneficial owners enjoy the property
Trustees essentially control the property as legal owner
Trustees act on behalf of the beneficiaries (more complicated but this is sufficient to understand the case)
The 3 judgements
House of Lords - For Mr Salomon:
Per Lord McNaughten: When the memorandum is duly signed and registered... the subscribers are a body corporate 'capable forthwith', to use the words of the enactment,
'of exercising all the functions of an incorporated company'
S.16 CA 2006:
(1) The registration of a company has the following effects as from the date of incorporation...
(3) That body corporate is
capable of exercising
all the functions of an incorporated company
HoL per Lord McNaughten:
Those strong words. The company attains maturity on its birth. There is no period of minority - no interval of incapacity. I cannot understand how a body corporate thus made 'capable' by statute can lose its individuality by issuing the bulk of its capital to one person...
The company is at law a different person altogether from the subscribers... 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 receive the profits, the company is not in law the agent of the subscribers or trustee for them
We are rejecting this idea, that by default, one person companies are mere agents or trustees for a principal/beneficiary. They are therefore all dinstict individual entities, separate from the shareholders
Even if what happened is that the business was set up by one individual shareholder in the same manner with the same people taking the profits
After incorporation, they are 2 different and separate individuals
Lord Halsbury:
"it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are
absolutely irrelevant
in discussing what those rights and liabilities
Fair? Read Lord McNaughten judgement:
Salomon appears to have acted in good faith - increased facility to borrow money
One person companies perfectly legitimate
"Ltd" - 'The unsecured creditors... have only themselves to blame... they had full notice they were no longer dealing with an individual...'
Limited Liability
Qualities
Measures of liability in a company limited by shares:
They are basically investing in a company to an amount they can afford to lose. It's "Limited" in a company because you are limiting your loss by buying a discreet package of shares
S.3 CA 2006:
(1) A company is a "limited company" if the liability of its members is limited by its constitution. It may be limited by shares or limited by guarantee
(2) If their liability is limited to
the amount, if any, unpaid on the shares held by them
the company is "limited by shares"
Limited by
shares
:
No statutory definition:
per Farwell J in Borland's Trustee v Steel [1901]:
"A share is the measure of a shareholder in the company measures by a sum of money for the purposes of liability in the first place and of interest in the second"
The greater number of ordinary shares that you have, the higher your interest/power you have in the company. Like your voice carries greater weight depending on the number of shares you have
Shares:
investment and control
Investment:
Nominal/par value
Authorised min in PLC's - £50,000 - S.7(63)(1)
PLCs - cannot allot unless paid up quarter of NV + whole premium (e.g. £5 market price, of which £4 is the premium and £1 is the NV £4.25) (S.586(1))
You cannot allot (or give shares) to the individual unless the paid up amount is a quarter of the nominal value plus the whole premium
Premium
- the value that the stock exchange puts on that share
The greater the premium, the more profitable the stock market thinks is in all these people who are within the stock market
Rights:
Right to vote (sometimes): voting right
Right to a distribution (dividend): income right
It's a qualified right. Only called when director's feel that the company has been profitable enough
Right to return of capital when company wound: capital right
The right to return that capital when companies wound up. If wound up solvent then you get your money back. If insolvent, you won't get it back at all
Don't confuse SLP AND LL
Companies have separate legal personality
Shareholders may (and normally do) limit their liability
The company has separate legal personality, but its the shareholders that have limited liability. THEY ARE NOT THE SAME THING.
Pros and Cons
Cons:
Ireland, 'Limited Liability, Shareholder Rights and the Problem of Corporate Irresponsibility [2010]:
Shareholder's paradise: a body of law able to combine the ruthless pursuit of "shareholder value" without any corresponding responsibility on the part of the shareholders
If shareholders have limited liability, they can just run the company as directors however they like. So if the worse happens, shareholders only lose a few grand
Invitation to behave irresponsibly
Pros:
Economic growth and expansion:
If you are limiting the risk of investors. If you let them invest in but they don't want to risk big amounts, you're allowing far more capital to go into companies for them to expand without the worry that individual investors are going to have everything taken off them
Consequences
Shareholders - Macaura v Northern Assurance Co [1925]:
-
Employees - Lee v Lee's Airfarming
Controllers - Salomon v Salomon:
-
Problems for
Corporate groups
Tort Claimants
Creditors
Piercing the Corporate Veil
We are removing this legal fiction of a company being its own person and attributing liability (usually to the underlying shareholders)
It's not a common policy, very rare that a veil is lifted
Not something that is done lightly
It gives favour to creditors to ensure creditors of various types like lenders/tortious claimants that they can attribute liability and get money back
Atlas Maritime v Avalon Maritime (No.1) (The Coral Rose)
[1991] - "To pierce the corporate veil is an expression I would reserve for treating the rights or liabilities or activities of a company as the rights and liabilities of its shareholders per Staugton LJ
Ignoring separate corporate personality:
Vague/woolly metaphors (Ottolenghi, 'From Peeping Behind the Corporate Veil, to Ignoring it Completely'
Piercing the veil
Removing the veil of incorporation
Setting aside the veil
Going behind the veil
Veil = Consequences of Corporate Personality:
Property, rights and liabilities belong to the company (narrow)
Other persons (e.g. shareholders) can have no effect on a company's rights and responsibilities (wide)
Statute lifts the veil in limited ways
Generally case law in this area is quite incoherent
Davies:
'The doctrine of lifting the veil plays a small role in British company law, once one moves outside the area of a particular contracts or statutes. Even where the case for applying the doctrine may seem strong, as in the
undercapitalised one-person company,
which may or may not be part of a larger
corporate group,
the courts are unlikely to do so (at 223)
Reasons for lifting the veil:
They are not articulated consistently (not so direct)
Heading of convenience (but with
no predictive power
):
Statute
Common law
Statutes:
S.761 CA 2006:
Talks about undercapitalised public companies and attributing liabilities and attributing liability where business is done on behalf or with an undercapitalised public company (you can attribute liabilities to other individuals
S.213 & 214 Insolvency Act 1986:
It's about wrongful trading but they still trade as normal anyway
Don't ignore SLP but just extend liability to others?
We're not really lifting the veil, we're just attributing liability to other people
Common law
Rogers AJA Briggs v James Hordie & Co Pty Ltd [1989]:
'There is no common unifying principle, which underlies the occasional decision of courts to pierce the corporate veil. Although an ad hoc explanation may be offered by the courts which so decides, there is no principled approach to be derived from the authorities'
There is no distinct outcome or tick box exercise where if you done X, Y and Z, the veil will be lifted (it's discretionary)
Different judges = different approaches to lifting the veil:
Lord Denning (who was always keen to lift the veil)
Littlewoods Mail Order Stores Ltd v Commissioners of the Inland Revenue
[1969]
vs
Re Securitybank
[1986]
4 reasons for piercing the veil
Single Economic Unit
The argument:
That a corporate group constitutes a single economic entity and thus the liabilities of any one member of the group could and should be treated as the liabilities of any other member of the group
e.g. like a partnership. Liability of one partner is the liability of all partners
A Ltd owned B Ltd then A Ltd (because it's a wholly owning parent) will also be liable for the liabilities of B Ltd
DHN Food Distributors ltd v Tower Hamlets Borough Council [1976]:
Lord Denning (at 860) - '... these subsidiaries are bound hand and foot to the parent company... The 3 companies should for present purposes be treated as one.. so DHN are entitled to claim compensation...'
Even if the subsidiary only owned fixed assets, Lord Denning still view the liability of one was the liability of all in the corporate group
But this is overruled by Adams v Cape,
no longer good law
Interests of Justice:
Mayson: this principle has been stated, denied and restated by the CA over a period of 30 years
Davies: vague; covered by other grounds?
The court deems it that it is in the interests of justice to lift that veil
It must be utilised in conjunction with either the agency argument or the sham for solid argument
Re a Company
[1985]
'...the court will use its powers to pierce the corporate veil if its necessary to achieve justice'
Adams v Cape Industries plc
[1990]
'...the court is not free to disregard the principle on Salomon... merely because it considers that justice so requires
Conway v Ratiu [2005]
'...the readiness of the courts... to draw back the veil to do justice when common sense and reality demand it' (Adams not referred to)
Justice by another route?
Prest (Appellant) v Petrodel Resources Limited & Others (Respondents)
[2013]
Lord Sumption puts the idea of the invasion principle (are you evading the statute/law?)
He says that we're looking at justice anyway so do we even need this interest of justice argument at all because there's nothing explicitly overruling it
So we can still use it, but with the tiebreaker
Agency:
Principal responsible for agent's actions
Agency is a question of fact
Company could be the agent of another person (natural or legal)
Matter of agency law
But if no agreement, fact of incorporation does not of itself create agency (Salomon)
Relationship of agency is also a fiduciary relationship (like a trustee in a beneficiary). So the principal is giving the agent power to operate in the principal's name. Agent acts as though it was the principal
Although it can be very effective for business, it can lead to principal being responsible for agent's actions and therefore liable for the agent's actions
Situation A: Whether there is a case of agency is a
question of fact.
So they will look at factors like: any kind of employment contract between the two, actions of the agent (whether it's indicative of it being a agency relationship)
Situation B: could be the agent of another person (either a natural or legal person) | individual set up company to act as its agent | another company to business as its agent
Being incorporated itself does not create agency even where it is a single person company with one person setting up the company
(that in itself does not make it an agent)
The fact that a parent company exercises control over its subsidiary does not itself justify treating the acts of the subsidiary as the acts of the parent
Exception:
Re FG (Films) Ltd
[1953]
The subsidiary company did nothing at all without the parent company telling it what to do
It's a difference between making key decisions in the life stuck in the life cycle of the company
Then from saying no, you have to get agreement at every single point of every action from the parent company
This shows an agency relationship based upon the fact in the construction of the facts
Smith, Stone and Knight Ltd v Birmingham Corporation
[1939]:
SSA (parent of Birmingham Waste Company who is a wholly-owned subsidiary) unlike Salomon the business was not transferred to the Waste Company, was still done by SSK.
Atkinson J's relevant factors to decide whether there is an agency relationship:
Who is really carruing on business?
Who receives the profits?
Who conducts business?
Who appoints those who conduct business?
Who is the heads and brains of the business?
Who is in effective and constant control of the business?
[But it's exceptional, not every factor will arise, will depend on the situation]
Adams v Cape Industries plc [1990]:
"... our law for better or worse, recognises the creation of subsidiary companies, which though... creatures of their parents, will nevetheless to be treated as separate legal intities
It is a pefectly legitimate exercise to set up different subsidiary companies to apportion different risks and liabilities
It's a very common business practice, helps economy to thrive
Sham, Cloak or Mask:
Adams v Cape Industries:
corporate structure must not be used to:
Evade limitations imposed on person's conduct by law,
Evade such rights of relief as a person may hold against any person
When someone has a claim or can reasonably foresee being attributed to a company e.g. tortious claim, you cannot set up another company that is undercapitalised which can frustrate that person's ability to exercise their claim
There is a difference between a sham and a facade:
Sham company: company that does not exist, did not go through proper incorporation
Facade: company exists, but its either used to evate liability or evade statute
Can be a sham, cloak or mask if company is entirely controlled by a natural/legal person that is used improperly to evade that control (its legal obligations
Sham: Evading rights which 3rd parties already possess - Trustor AB v Smallbone (No.2) [2001]:
'... the court is entitled to "pierce the corporate veil'" and recognise... the company as that of the individual(s) in control of it if the company was used as a device or cadence to conceal the true facts thereby avoiding or concealing any liability of those individuals
Sham: Evading limitations imposed by law - Gilford Motor Co Ltd v Horne [1933]:
Facts: Director wanted to avoid restrictive covenant, set up competitor company with wife, argued against injunction: not him but the company in competition
Held: Just a way of getting around pre-existing legal duty. Because he set up the company with his wife just to get around (evade/escape) the restrictive covenant
= facade, veil CAN be lifted
Sham: Evading limitations imposed by law - Jones v Lipman [1962]:
Facts: Vendor of land decided he did not want to sell after all despite exchanging contracts, order made for specific performance, set up a company and transferred the property to it, order fo specific performance then made against newly formed company
Held: A facade company, did it to specifically avoid/evade a legal obligation, therefore we'll also make a performance order against the newly formed company, ordered to transfer over the land
Prest v Petrodel Resources Ltd [2013]:
Per Lord Sumption: "But when we speak of piercing the corporate veil [should be speaking... only of those cases which are true exceptions to the rule in
Salomon
...ie where a person who owns and controls a company is said in certain circumstances to be identified with it in law by virtue of that ownership and control".
[Cannot be used whenever the courts feel like it] [Treat lifting the corporate veil as an EXCEPTION]
Consequences of Piercing
Replacing as though puppeteer was original party to the contract? (you replace that company as though the puppeteer was the original party to the contract), you're replacing one party with another with exactly the same rights and liability
Making sense of it all - repeating the 'confusion'
Littlewoods Mail Order Stores Ltd v Commissioners of Inland Revenue [1969]:
'The doctrine laid down in Salomon... has to be watched very carefully (per Lord Denning at 1254)
It should be watched carefully for any kind of breach of that privilege, being able to attribute liability to an entirely different entitly despite you being one person setting it up
You've got to watch it to make sure its not doing any kind of injustice
Re Securitibank Ltd (No.2) [1978]:
'... I would rather approach the question the other way around, that is to say on the basis that any suggested departure from the doctrine laid down in
Salomon...
should be watched very carefully
So rather than kind of watch it to make sure that it's not causing any injustice, we must look to make sure that the doctrine is not tampered with because its such an important part of the economy
Ottolenghi's 4 categories:
Peeping behind: to get information about the company
Penetrating: 'reach through the veil and graspt the controlling shareholders personally'
Extending: to encompass others in a group
Ignoring: sham/facade
Other attempts to rationalise
Moore:
Narrow interpretation by Slade LJ in
Adams v Cape
of sham cases is unsustainable
Company's legal identifiy may be ignored where the ultimate purpose of the company is to shielf its founder from reproach
'Genuine ultimate purpose' is the correct test for piercing the veil
Ziegler and Gallagher:
All categories can be subsumed into injustice
Who suffers?
a) trade creditors
b) tort claimants