Lecture notes
Company Law
- Module
- Company Law
- Institution
- University College London (UCL)
Comprehensive and detailed notes covering the entirety of the Company Law module of the Law (LLB) degree at University College London (UCL).
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I.#Corporate#entity,#limited#liability#and#incorporation!!
I.#Corporate#entity!
!
The#‘Salomon’#doctrine!
!
•! Corporate!entity!and!limited!liability!were!cemented!into!English!law!by!Salomon!v.!
Salomon!&!Co.![1897].!
o! Incorporation!gives!the!company!legal!personality,!separate!from!its!members.!
!! The!company!may!own!property,!sue,!and!be!sued!in!its!own!corporate!
name.!
!! It!will!not!die!when!its!members!die.!
•! Salomon!v.!Salomon!&!Co.![1897].!
o! Salomon!was!a!sole!trader.!
!! Sold!his!business!to!a!company!he!formed!in!return!for!fully!paidEup!
shares!in!it!allotted!to!him!and!members!of!his!family.!
!! Salomon!also!received!an!acknowledgement!of!the!company’s!
indebtedness!to!him,!in!the!form!of!secured!debentures.!
•! These!were!later!mortgaged!to!an!outsider.!
o! Soon!after!formation,!the!company!went!into!liquidation.!
!! The!debentures,!being!secured!by!a!charge!on!the!company’s!assets,!
ranked!in!priority!to!the!trade!creditors.!
•! The!mortgage!to!the!outsider!was!paid!off.!
!! £1,000!remained,!and!Salomon,!as!unencumbered!owner!of!the!
debentures,!claimed!this!in!priority!to!the!trade!creditors.!
o! House!of!Lords!affirmed!the!principle!that!the!company!was!a!separate!legal!
person!from!the!controlling!shareholder,!and!that!it!was!not!to!be!regarded!as!his!
agent.!
!! It!also!made!clear!that!he!was!not!liable!to!indemnify!the!creditors,!thus!
giving!effect!to!the!limited!liability!doctrine.!
•! Macaura!v.!Northern!Assurance!Co.![1925].!
o! Macaura!took!out!an!insurance!policy!in!his!own!name!for!his!assets!(thinking!
that!this!would!extend!to!his!company’s!timber).!
!! The!timber!was!destroyed!in!a!fire.!
•! The!insurance!company!argued!that!the!assets!were!the!
company’s,!not!his!personal!assets,!thus!making!them!not!liable.!
o! Court!applied!the!Salomon!doctrine,!agreeing!with!the!insurance!company.!
!
Piercing#the#corporate#veil!
!
•! Salomon!doctrine!can!produce!unjust!results.!
o! e.g.!Company!A!has!a!subsidiary,!Company!B.!
!! Company!A!owns!land!on!which!stands!a!factory,!which!Company!B!
operates!business!in.!
•! A!local!government!authority!makes!a!compulsory!purchase!of!
the!land!under!a!statute!which!provides!for!compensation!for!the!
landowner!in!respect!of!disturbance!to!a!business!carried+on+by+
him+on+the+land.!
o! Here,!Company!A!is!not!carrying!out!business,!and!
Company!B!is!not!a!landowner.!
o! Gilford!Motor!Co.!v.!Horne![1933].!
!! H!was!a!former!employee!of!G.!
•! H!was!asked!to!sign!a!nonEcompete!clause.!
o! H!tried!to!start!a!company!in!his!wife’s!name!to!avert!the!
clause.!
!! Court!held!that!the!company!was!a!sham.!
•! Its!only!purpose!was!to!bypass!the!nonEcompete!clause.!
o! Smith,!Stone!&!Knight!v.!Birmingham!Corporation![1939].!
!! Judge!decided!that!Company!B!was!an!agent!of!Company!A,!thus!
making!compensation!payable.!
1
, •! Agency!here!was!inferred!on!very!little!evidence!in!order!to!get!
round!the!Salomon!principle.!
o! Jones!v.!Lipman![1962].!
!! J!and!L!had!a!contract!for!sale!of!land.!
•! Seller!decided!he!no!longer!wanted!to!sell.!
o! Transferred!all!of!the!shares!into!a!company,!and!
claimed!he!no!longer!owned!the!land!so!he!cannot!sell.!
!! Court!held!that!the!company!was!a!sham.!
•! Its!only!purpose!was!to!bypass!the!contract.!
o! DHN!Ltd.!v.!Tower!Hamlets![1976].!
!! Lord!Denning!suggested!that!the!corporate!veil!could!be!lifted,!that!the!
companies!were!in!reality!a!group,!and!should!be!treated!as!one,!thus!
making!compensation!payable.!
o! Woolfson!v.!Strathclyde!DC!(1978).!
!! The!approach!above!was!criticised.!
!! House!of!Lords!held!that!the!corporate!veil!could!only!be!lifted!in!this!way!
in!circumstances!were!the!company!is!a!‘facade’.!
o! Re!A!Company!(1985).!
!! Court!of!Appeal!took!the!view!that!the!Salomon!doctrine!was!of!prima!
facie!application!only.!
•! “The!court!will!use!its!powers!to!pierce!the!corporate!veil!if!it!is!
necessary!to!achieve!justice.”!
o! Creasey!v.!Breachwood!Motors!Ltd.![1992].!
!! Held!that!the!court!had!power!to!lift!the!veil!“to!achieve!justice!where!its!
exercise!is!necessary!for!that!purpose.”!
o! Adams!v.!Cape!Industries!plc.![1990].!
!! The!idea!that!a!court!was!free!to!disregard!Salomon!merely!because!it!
considered!that!justice!so!required!was!firmly!rejected.!
!! The!court!gave!strong!support!to!the!idea!that!there!is!really!only!one!
wellErecognised!exception!to!the!rule!prohibiting!the!piercing!of!the!veil.!
•! “It!is!appropriate!to!pierce!the!corporate!veil!only!where!special!
circumstances!exist!indicating!that!it!is!a!mere!facade!concealing!
the!true!facts.”!
•! Sham,!agency,!statute.!
o! Ord!v.!Belhaven!Pubs!Ltd.![1998].!
!! Flatly!overruled!Creasey!v.!Breachwood!Motors![1992].!
!! Where!the!company!is!conducting!business!ordinarily,!it!is!not!a!sham!or!
facade.!
•! “It!was!just!the!ordinary!trading!of!a!group!of!companies!under!
circumstances!where!the!company!is!in!law!entitled!to!organise!
the!group’s!affairs!in!the!manner!that!it!does.”!
!
Corporate#liability#for#torts#and#crimes!
!
•! The!problem!of!the!corporate!mind.!
o! Doctrine!of!separate!legal!personality!of!companies!is!problematic!where!it!meets!
parts!of!the!general!law!which!involve!assessing!the!mental!state!of!the!‘person’!
for!the!purpose!of!imposing!liability.!
!! Treating!the!state!of!mind!of!the!senior!officers!of!the!company!as!being!
the!state!of!mind!of!the!company.!
•! Bolton!Engineering!v.!Graham![1956].!
o! Court!of!Appeal!held!that!the!intention!of!the!company!
could!be!derived!from!the!intention!of!its!officers!and!
agents.!
o! “A!company!may!in!many!ways!be!likened!to!a!human!
body.!It!has!a!brain!and!a!nerve!centre!which!controls!
what!it!does!…!Directors!and!managers!represent!the!
directing!mind!and!will!of!the!company!and!control!what!
it!does.!The!state!of!mind!of!these!managers!is!the!state!
2
, of!mind!of!the!company!and!is!treated!by!the!law!as!
such.”!(Denning!LJ)!
•! Corporate!liability!for!torts.!
o! A!company!is!vicariously!liable!for!torts!committed!by!its!servants!or!agents!
acting!in!the!course!of!their!employment.!
!! The!employee!who!actually!commits!the!act!will!also!be!liable!as!the!
primary!tortfeasor.!
o! Williams!v.!Natural!Life!Health!Foods![1998].!
!! Must!be!shown!that!there!was!an!assumption!of!responsibility!sufficient!
to!create!the!necessary!special!relationship!for!personal!liability!to!be!
found.!
o! Chandler!v.!Cape!plc.![2011].!
!! Judge!applied!the!tripartite!test!of!foreseeability,!proximity,!and!whether!it!
was!fair,!just!and!reasonable!for!a!duty!to!exist!as!laid!down!in!Caparo!
Industries!plc!v.!Dickman![1990].!
•! Corporate!liability!for!crimes.!
o! Companies!can!now!have!direct!criminal!liability!imposed!on!them!by!‘identifying’!
senior!individuals!whose!state!of!mind!can!be!regarded!as!that!of!the!company!
for!the!purposes!of!establishing!mens!rea.!
o! Corporate!liability!for!manslaughter.!
!! R!v.!P&O!European!Ferries!(Dover)!Ltd.!(1990).!
•! Company!could!be!indicted!for!manslaughter,!but!it!is!necessary!
to!be!able!to!identify!one!individual!who!had!the!necessary!
degree!of!mens!rea!for!manslaughter.!
!! Corporate!Manslaughter!and!Corporate!Homicide!Act!2007.!
•! Where!the!conduct!of!the!company!falls!below!what!could!
reasonably!be!expected,!death!will!be!regarded!as!having!been!
caused!by!the!conduct!of!the!company!if!it!is!caused!by!a!failure!
in!the!way!the!company’s!activities!are!managed!and!organised.!
!
II.#Limited#liability!
!
The#meaning#of#limited#liability!
!
•! Commonly!used!to!describe!the!situation!where!a!person!has!done!an!act!which,!under!
the!generally!prevailing!rules!of!the!legal!system,!would!incur!a!liability!to!pay!money!but!
is!excused!(wholly!or!partly)!from!incurring!that!liability.!
•! Within!company!law,!it!is!the!principle!as!a!result!of!which!the!members!of!an!insolvent!
company!do!not!have!to!contribute!their!own!money!to!the!assets!in!the!liquidation!to!
meet!the!debts!of!the!company.!
o! Under!the!Insolvency!Act!1986,!the!members!have!a!liability!to!contribute!to!the!
assets!of!the!company!in!the!event!of!its!assets!in!the!liquidation!being!
insufficient!to!meet!the!claims!of!the!creditors.!
!! It!is!this!liability!which!is!limited.!
!
The#continuing#debate#about#the#desirability#of#limited#liability!
!
•! The!essence!of!the!argument!in!favour!of!permitting!limited!liability.!
o! Manufacturing,!trade!and!economic!activities!generally!are!good!for!us.!
!! They!create!the!goods!and!services!which!we!like!having!around!us!and!
which!enrich!our!lives.!
•! Thus!a!business!form!which!is!conducive!to!economic!activity!is!
preferable!to!one!which!is!not!and!limited!liability!is!needed!
because!it!encourages!the!channelling!of!resources!into!
productive!businesses.!
•! Limited!liability!encourages!the!channelling!of!resources!into!
productive!businesses.!
o! Investment!in!the!company!without!having!to!worry!much!
about!the!liabilities!being!incurred!by!the!company.!
o! Enables!the!productive!use!of!small!capital.!
3
, !! A!small!investor!knows!that!his!liability!exposure!is!limited!to!a!certain!
amount.!
•! Allows!companies!to!acquire!lots!of!capital,!resulting!in!larger!
possibilities.!
o! Facilitates!free!trade,!and!breaks!down!monopolies.!
•! The!main!argument!against!this!is!that!limited!liability!encourages!recklessness!in!
business!ventures!and!innocent!creditors!have!to!bear!the!loss.!
o! It!is!immoral.!
!! If!one!runs!a!business,!one!should!pay!for!one’s!debts.!
o! Fosters!excessive!riskEtaking.!
!! High!risk!and!low!liability!equates!to!high!return.!
!
Fraudulent#trading#and#wrongful#trading#(statutory#basis#for#veil#piercing)!
!
•! Fraudulent!trading.!
o! Section!213,!Insolvency!Act!1986.!
o! Under!the!present!form!of!the!provisions!the!court!has!power!to!declare!that!
persons!who!have!carried!on!a!company!with!intent!to!defraud!creditors!are!liable!
to!make!contributions!to!the!company’s!assets.!
!! Criminal!liability!can!also!attract!up!to!ten!years’!imprisonment.!
!! Re!Patrick!&!Lyon!Ltd.![1933].!
•! “Actual!dishonesty,!involving,!according!to!current!notions!of!fair!
trading!among!commercial!men,!real!moral!blame.”!
!! Re!Todd!Ltd.![1990].!
•! Director!was!liable!for!debts!of!the!company!amounting!to!
£70,401.!
•! Wrongful!trading.!
o! Section!214,!Insolvency!Act!1986.!
o! An!attempt!to!discourage!and!penalise!abuses!of!limited!liability!which!stemmed!
from!negligent!conduct.!
o! Court!may!declare!that!the!director!is!liable!to!make!such!contribution!to!the!
company’s!assets!as!the!court!thinks!proper.!
o! Liability!will!arise!where!the!company!has!gone!into!insolvent!liquidation!and!at!
some!point!before!commencement!of!the!winding!up,!the!director!“knew!our!
ought!to!have!concluded!that!there!was!no!reasonable!prospect!that!the!
company!would!avoid!going!into!insolvent!liquidation”.!
!! If!the!director!continues!trading!after!the!‘moment!of!truth’!when!the!
reasonable!director!should!realise!that!the!company!cannot!recover,!he!
does!so!with!the!risk!that!in!the!subsequent!insolvent!liquidation!the!court!
will!order!him!to!make!a!contribution.!
o! Re!Produce!Marketing!Consortium!Ltd.!(No.!2)!(1989).!
!! Company!gradually!drifted!into!a!position!of!insolvency!with!losses!
amounting!to!£317,694.!
•! For!various!reasons!it!was!held!that!the!directors!should!have!
put!the!company!into!creditors’!voluntary!liquidation!earlier!than!
they!did.!
o! Jointly!ordered!to!pay!the!liquidator!£75,000.!
o! Re!Sherborne!Ltd.![1995].!
!! Directors!injected!more!of!their!own!funds!into!the!company!so!that!
capital!increased.!
!! Directors!were!not!regarded!as!having!acted!unreasonably!in!all!the!
circumstances!and!escaped!liability.!
!! Judge!Jack!QC!counselled!against!“the!danger!of!assuming!that!what!
has!in!fact!happened![liquidation]!was!always!bound!to!happen!and!was!
apparent”.!
o! Re!Hydrodam!Ltd.![1994]!and!Re!PFTZM!Ltd.![1995].!
!! A!considerable!level!of!involvement!by!holding!company!directors!in!the!
affairs!of!the!subsidiary!is!likely!to!be!required!before!a!holding!company!
will!be!held!to!be!a!shadow!director.!
o! Success!of!section!214.!
4
, !! Unsuccessful.!
•! In!many!cases!liquidators!will!not!want!to!risk!incurring!the!costs!
of!bringing!the!proceedings!against!the!directors,!since!the!
prospect!of!a!successful!outcome!is!uncertain.!
o! All!that!happens!is!that!the!assets!which!might!otherwise!
have!been!available!for!the!creditors!in!the!liquidation!
are!wasted!on!legal!proceedings.!
!! Successful.!
•! In!many!situations!the!wrongful!trading!provisions!are!probably!
operating!on!the!minds!of!directors.!
•! Directors!of!small!businesses!which!are!sinking!will!already!be!
facing!personal!insolvency!–!the!threat!of!wrongful!trading!will!
hardly!make!matters!seem!any!worse.!
•! The!legislation!represents!an!important!theoretical!limitation!on!
the!doctrine!of!limited!liability.!
!
III.#Groups#of#companies!
!
•! Most!large!businesses!are!carried!on!through!the!medium!of!groups!of!companies.!
o! English!company!law!is!unreactive!to!the!phenomenon!of!corporate!groups,!and!
almost!invariably!proceeds!to!apply!the!Salomon!entity!concept!separately!to!
each!company!in!the!group.!
!! Thus!limited!liability!for!corporate!debts!is!the!automatic!right!of!the!
holding!company.!
!! A!holding!company!has!a!right!to!deliberately!set!about!creating!
structures!which!minimise!its!own!liability.!
•! “We!do!not!accept!as!a!matter!of!law!that!the!court!is!entitled!to!
lift!the!corporate!veil!as!against!a!defendant!company!which!is!a!
member!of!a!corporate!group!merely!because!the!corporate!
structure!has!been!used!to!ensure!that!the!legal!liability!(if!any)!in!
respect!of!future!activities!of!the!group!…!will!fall!on!another!
member!of!the!group!rather!than!the!defendant!company.!
Whether!or!not!this!is!desirable,!the!right!to!use!a!corporate!
structure!in!this!manner!is!inherent!in!our!corporate!law.”!
o! Slade!LJ,!Adams!v.!Cape!Industries!plc.![1990].!
o! Section!1159(1),!Companies!Act!2006.! !
!! A!company!is!a!‘subsidiary’!of!another!company,!its!‘holding!company’,!if!
that!other!company!–!
•! (a)!holds!a!majority!of!the!voting!rights!in!it,!or!
•! (b)!is!a!member!of!it!and!has!the!right!to!appoint!or!remove!a!
majority!of!its!board!of!directors,!or!
•! (c)!is!a!member!of!it!and!controls!alone,!pursuant!to!an!
agreement!with!other!shareholders!or!members,!a!majority!of!the!
voting!rights!in!it,!or!if!it!is!a!subsidiary!of!a!company!which!is!
itself!a!subsidiary!of!that!other!company.!
!
IV.#Incorporation!
!
Formal#requirements!
!
•! All!that!is!necessary!to!form!a!company!by!registration!is!for!certain!documents!to!be!
delivered!to!the!Registrar!of!Companies!along!with!the!registration!fee.!
•! Registration.!
o! Section!8(1).!
!! Defines!the!memorandum!of!association!as!a!memorandum!stating!that!
the!subscribers!wish!to!form!a!company!under!the!Act!and!agree!to!
become!members!of!the!company!and,!in!the!case!of!a!company!that!is!
to!have!a!share!capital,!to!take!at!least!one!share!each.!
o! Section!9(1).!
5
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