Lecture notes
LAWS08134 Business Entities COMPANY LAW LECTURE NOTES
- Module
- LAWS08134 Business Entities
- Institution
- The University Of Edinburgh (ED)
LAWS08134 Business Entities COMPANY LAW LECTURE NOTES
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COMPANY LAWNATURE AND STRUCTURE OF COMPANIES
Natural persons and juristic persons
1. Natural (physical) persons. “Individuals.”
2. Juristic (legal, artificial, moral) persons. “Corporations”. “Bodies corporate”.
A company is deemed as a legal person, more specifically a juristic person.
Capacity of juristic persons
Be a creditor? Be a debtor? Have a bank account? Own heritable property? Be a
landlord? Be a tenant? Sue? Be sued? – things a company can do.
Make a will? Be a legatee? Commit a delict? Commit a crime? Marry? Be an
employee? Be an employer? Buy? Sell? Be a solicitor? Vote? Be liable for tax? Be an
MP?- things companies cannot do.
Crime: Transco plc v HMA 2004 SLT 41 – but see Section 1 of the Corporate Manslaughter
and Corporate Homicide Act 2007 (a statute of the UK Parliament). In some cases it can
be liable for criminal acts. The issue is that company cannot be put in jail. It can be fines
or have its assets ceased. You can however put the officers of the company in jail.
See VTB Capital plc v Nutritek International Corp [2013] UKSC 5; [2013] 2 AC 337; [2013]
2 WLR 378, para 138, per Lord Neuberger PSC, who refers to a company being like “a
human being”, except it will act through human agents, with the company as “principal”.
Main forms of business
Business can be carried on through the following different “vehicles”:
Sole trader- unlimited liability.
Ordinary partnership (Partnership Act 1890)
Limited partnership (Limited Partnerships Act 1907)
Limited liability partnership (Limited Liability Partnerships Act 2000)
Company (Companies Act 2006 and previous Companies Acts) We need at least
one person who subscribes for the shares of the company. It has a separate
personality from the owners of the company. It has limited liability.
Company Law is not a devolved matter under the Scotland Act 1998; neither, generally,
is corporate insolvency (which you will look at in Commercial Law (Ordinary)).
Remember: a company is a vehicle through which business is done: it is separate from
the business: (i.e., the provision (or receipt) of goods and/or services). The business is
the activity and the company is the vehicle through which the activity is carried out.
Why is a Company Needed?
Companies play in an important role in the economic life of a country, as they are the
main commercial vehicle for doing business. Not only are they responsible for the
,production of goods and the provision of goods and/or services, but they can also be
used as an investment.
As an investment, they provide a return on that investment in the form of income
(dividends), and capital growth (an increase in the value of the company, which is
reflected in its share price).
This is important in relation to pensions, as fund (or asset) managers, who look after
pension funds, invest in companies.
See too Lord Sumption JSC, in Prest v Petrodel Resources Ltd [2013] UKSC 34; [2013] 2
AC 415; [2013] 3 WLR 1, para 8 on the importance of the company in “commercial life”.
Core Characteristics of a Company
Professor Davies, Introduction to Company Law (2010), at pp 10-11 and 21-22 lists “five
core, structural features of company law”:
“separate” legal “personality”.
“limited liability”. Shareholders don’t have responsibility for the debts of the
company.
central management with a “board” i.e. the group of people who run the company
i.e. the board of directors and decisions are made on a majority basis. Directors
cannot run as a frolic on their own.
shareholders having “control”, who can vote directors of the board and vote on
fundamental issues like special resolutions for the amendment of the constitution
of the company.
shares being freely transferable- sell shares without restrictions for plcs’. For
private companies there could be pre-emptive rights where for sale of shares
priority is given to the existing shareholders.
Normally the directors have shares. Shares represent the person’s stake in the company.
See Standard Chartered Bank v Pakistan National Shipping Corpn [2003] 1 AC 959, at
paras 36 and 37, Lord Rodger of Earlsferry, who refers to the commercial importance of
companies, due to their being separate legal entities, which can be involved in
transactions, own property, and bring legal proceedings, as well as having limited liability
of members of the company. Due to this last reason, companies can raise money as risk
to investors is reduced; also, because of this, the corporate veil should only be pierced
exceptionally, with shareholders being made personally liable.
Moreover, Lord Sumption JSC, in Prest v Petrodel Resources Ltd [2013] UKSC 34; [2013] 2
AC 415; [2013] 3 WLR 1, para 8, referred to the separate legal personality of a company
being “a fiction”, which underlies “company law”, as well as “insolvency law”.
Separation of Ownership and Management
Types of Company
Unlimited company – s 3(4) CA 2006- no limit on liability of memebers.
Private limited company – ss 3(1)-(3) and 4(1) CA 2006- membership restricted.
Public limited company – ss 3(1)-(3) 4(2) CA 2006- membership open to the
general public and thus shares are sold on the market.
Company limited by guarantee – ss 3(1), 4(1)-(2), 5 CA 2006- there are no shares,
but members liability is limited by the constitution where there is a guarantee as
to the liability upon liquidation.
,Main distinction between: (i) private limited companies limited by shares, and (ii) public
limited companies limited by shares. Both companies have shares and shareholders.
We will focus on these types of company: see ss 3(1), (2) and 4 CA 2006
See also Part 20 CA 2006
Overview of the different types of company
Limited by shares Limited by guarantee Unlimited
Public Yes Yes (new innovation – see CANo
2006, s 4(2))
Private Yes Yes Yes
CONSEQUENCES OF INCORPORATION
When a company is created (i.e., brought to life), it is said to be incorporated.
Alternatively you could buy a ready-made company off the shelf from a solicitor or an
accountant.
[NB “pre-incorporation contracts” – personal liability where company not incorporated:
see s 51 CA 2006; Kelner v Baxter (1866) LR 2 CP 174; Newborne v Sensolid (Great
Britain) Ltd [1954] 1 QB 45; and Phonogram Ltd v Lane [1982] QB 938 (CA). You have
dealt with this in agency.]
There are two main consequences of incorporation:
(i) Separate Legal Personality; and
(ii) Limited Liability (except for unlimited companies).
Separate Legal Personality
A company is a separate legal entity, like a natural person. This means, for example, a
company can sue, and be sued, in its own name, enter into contracts, and own property.
Thus, as a company is separate from its shareholders (owners) and directors
(management), subject to certain exceptions below, ie, it has a legal existence, which is
separate from those that own it (shareholders) and/or those who run it (directors). If the
company enters into a contract and breaches it then only the company can be sued.
Cases of Separate Legal Personality
***Salomon v Salomon & Co. Ltd [1897] AC 22 (the most famous and important case in
company law). Must be read! A trader sold a solvent business to a limited company
with a nomina capital of 40,000 shares of 1l. each, the company consisting only of the
vendor, his wife, a daughter and four sons, who subscribed for one share each, all the
terms of sale being known to and approved by the shareholders. *23 In part payment of
the purchase-money debentures forming a floating security were issued to the vendor.
Twenty thousand shares were also issued to him and were paid for out of the purchase-
money. These shares gave the vendor the power of outvoting the six other shareholders.
, No shares other than these 20,007 were ever issued. All the requirements of the
Companies Act 1862 were complied with. The vendor was appointed managing director,
bad times came, the company was wound up, and after satisfying the debentures there
was not enough to pay the ordinary creditors: —Held, that the proceedings were not
contrary to the true intent and meaning of the Companies Act 1862 ; that the company
was duly formed and registered and was not the mere “alias” or agent of or trustee for
the vendor; that he was not liable to indemnify the company against the creditors'
claims; that there was no fraud upon creditors or shareholders; and that the company (or
the liquidator suing in the name of the company) was not entitled to rescission of the
contract for purchase.
Abstract of Salomon: The appellant leather merchant (S) appealed against a decision that
his formation of a limited company had been a mere scheme to enable him to carry on
business with limited liability, contrary to the true intent and meaning of the Companies
Act 1862. S had formed a limited company and sold his leather business to it. In order to
comply with the requirement of the Companies Act 1862 that there should be at least
seven shareholders, six members of his family were issued with one share each. S held
some 20,000 shares and in part payment for the sale, debentures of the company were
also issued to him. All the requirements of the Act were complied with. Eventually, the
company was placed in liquidation and after satisfying the debentures, there were not
enough funds to pay the ordinary creditors. The liquidator claimed that the formation of
the company had been a fraud upon its creditors. The judge at first instance held that the
business was S's business and no one else's and that he had chosen to employ a limited
company as an agent which he was bound to indemnify. The Court of Appeal held that it
was manifest that six of the members existed simply in order to enable the seventh to
carry on business with limited liability. It stated that the Act contemplated the
incorporation of seven bona fide members, who had minds and wills of their own and
were not the mere puppets of an individual who carried on his old business in the same
way as when he was a sole trader. The issue was whether the company had been validly
constituted.
Appeal allowed. In deciding whether the company had been validly constituted, the sole
guide had to be what the Act determined. The first condition of the statute was satisfied
because there were seven living persons who held shares in the company. The Act did
not stipulate the extent or degree of interest which might be held by each shareholder,
or the proportion of interest or influence which might be possessed by one or the
majority of the shareholders. The intention of the legislature which the Court of Appeal
referred to was not manifested in the statute, which simply said that one share was
sufficient to constitute a shareholder. There was nothing to suggest a limitation of that
provision and the court could not insert such a limitation into the Act. It was hard to see
how it could be lawful for three, four or six persons to form a company for the purpose of
employing their capital in trading, with the benefit of limited liability, and not for one
person to do so. Once a company was legally incorporated, it had to be treated like any
other independent person with rights and liabilities of its own and the motives of those
who took part in the promotion of the company were irrelevant. If the formation of the
company had been a mere scheme to enable S to carry on business in the name of the
company, that was not contrary to the true intent and meaning of the Act. It made no
difference if the other six shareholders were mere dummies and held their shares in trust
for S. The conclusion of the judge at first instance that the company was an agent
involved a singular contradiction. Either the limited company was a legal entity or it was
not. If it was, the business belonged to it and not to S and the company was a distinct
legal persona. If it was not a legal entity, it could not be an agent. The fact that a
company carried on business for and on behalf of its shareholders did not constitute the
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