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Summary Introduction and piercing the corporate veil

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An introduction to corporate law including an in-depth description of the case law concerning the lifting and piercing of the corporate veil.

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  • December 20, 2017
  • 17
  • 2017/2018
  • Summary

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COMPANY LAW SUPERVISION I
INTRODUCTION TO COMPANY LAW; FORMS OF BUSINESS ASSOCIATION;
‘PIERCING THE CORPORATE VEIL’

1. INTRODUCTION

- Company law grew out of partnership law in the mid nineteenth century in response to need
for a new legal form to accommodate a proliferation of large-scale business enterprises.

- The first general incorporation Act, the Joint Stock Companies Act 1844 was followed by
the Limited Liability Act 1855.

Why was this new form needed?

- Separation of management and capital: Huge amounts of up-front capital was needed to
launch large industrial enterprises. However, the business would be unmanageable if large
groups of investors had a say in the management of these enterprises, especially in areas
where investors would have little to no experience.

- Common sense therefore dictated that the business affairs of the enterprise be conducted by a
small group of managers, with full control of the corporate assets (to the exclusion of
investors).

This exclusion from management and ownership of the business assets mean that investors could
not be held liable for the debts of the business should it fail, hence the requirement to give the
business its own legal personality.

- This resulted in the three key features of the modern company: separate corporate
personality; management under a board; and limited liability for shareholders.

2. FORMS OF BUSINESS ASSOCIATION CONTRASTED

2.1. Sole Tradership

 Informal, no registration requirement, little regulation.
 No distinction (in law) between identity of individual and business. Debts/assets of business
are therefore debts/assets of individual.

- Many individuals carry out business as a sole trader. Some is a sole trader if they sell goods
informally online e.g. via eBay.

- Flexibility and informality are key advantages. For example, there is no needs for the trader to
publish their accounts.

- The lack of separate legal personality can inhibit growth of the business. However, enterprises
conducted as sole traderships tend to be very small in scale: where growth is necessary,
individuals may seek greater formality.

2.2. Partnership

- Two or more people coming together to carry on business with a view to profit.

- Partnerships have their basis in contract: it is an agreement between individuals. Partnerships
may be established either actively (i.e. where the parties know that they are forming a
partnership) or passively.

, - Flexible default rules are provided by statute (Partnership Act 1890). In general, these rules
will apply where the partnership is created passively – in cases of active creation, these rules
can be excluded.

- Partnerships do not have separate legal personality from partners. Partnership property is
therefore vested in partners jointly, but a distinction is drawn between a partner’s personal and
business assets.

Personal creditors of the partner, for example, cannot claim against partnership assets unless or until
all creditors of the partnership have been paid off.
- Limitations:

 It can be difficult to deal with partnership property if partners disagree – a complex
partnership agreement is required to avoid this.
 Lack of separate personality means a partnership does not automatically have ‘perpetual
succession’. This can make it difficult when new partners join or old ones leave: in this
situation, the partnership comes to an end, meaning that a new partner would not be liable
for the debts of the existing partnership.
- Unlimited liability can make partnership an unattractive vehicle for ‘passive’ investment.

2.3. The Company Limited by Shares (under the CA 2006)

 Formed under statute with due formality.
 Subject to on-going regulation (though note public/private company distinction).
 Separate legal personality.
 Members may benefit from limited liability.
 Has perpetual succession.

- If the company has shares, the members of the company are its shareholders. These
shareholders provide ‘equity funding’ to the company by way of paying for their shares.

2.4. Other forms of Business Association

- There are many other forms of business association recognised by law. They include:

 Unlimited Companies and Companies Limited by Guarantee: Identical to companies limited
by shares, save that the members chose not to limit their liability at all (unlimited company), or
chose to limit liability by guaranteeing to pay a fixed amount towards company debts in the event
of insolvent liquidation (company limited by guarantee). Neither form of company is particularly
common.

 Limited Partnerships: These are partnership with limited liability. Limited liability partners may
not participate in management (this is the main disadvantage with this sort of business
association). Limited Partnerships are few in number (around 19,000 registered at Companies
House).

 Limited Liability Partnerships: These are, in reality, a different form of company, They were
introduced because certain professional bodies (the Solicitors’ and Accountants’ Societies)
prohibited their members from carrying out their business through the medium of a company –
this was through fears of conflicts of in interest regarding shareholders.

, In 2000, Parliament introduced this new form of partnership, which have legal personality, limited
liability and which allow partners to participate in management. They are also taxed like
partnerships. Around 43,000 LLPs are registered at Companies House.
3. THE CLASSIFICATION OF COMPANIES

3.1. Public and private companies

- The distinction between public and private companies is found in section 4(2) CA 2006:

“A “public company” is a company limited by shares or limited by guarantee and having a share capital—

(a) Whose certificate of incorporation states that it is a public company, and

(b) In relation to which the requirements of this Act, or the former Companies Acts, as to
registration or re-registration as a public company have been complied with on or after
the relevant date.”


- A private company is defined as being “not a public company” (s.4(1) CA 2006).

- There is an ‘authorised minimum share capital requirement’ of £50,000 for public companies
(s.763 and s.761 CA 2006). At least one-quarter (£12,500) must be paid up on incorporation.

- Only public companies may offer their shares for sale to the general public and so can be
listed on The Stock Exchange (s.755 CA 2006). However, public companies are not obliged
to list on The Stock Exchange.

- Public companies are generally subject to tougher regulation than private companies e.g. rules
on payment for share capital (Part 17 CA 2006), and the requirement to hold an AGM.

- Less than 1% of registered companies are public companies. However, public companies
account for over 50% of capital invested in UK companies. They are few in number, but
economically very important.

- Legislation makes a number of concessions for private companies e.g. a private company may
have only one director while a public company must have at least two (s.154).

3.2. Limited and unlimited companies

- Section 3 defines a ‘limited company’ and an ‘unlimited company’. A company may be
limited by shares or by guarantee by an appropriate limiting provision in the company’s
constitution.

- An unlimited company has no limit on the liability of its members. In other words, members
can be called upon to satisfy personally the whole of its liabilities to its creditors.

- Unlimited companies are exempt from the statutory obligation to publish their accounts and
reports (s.448).

4. FORMING A COMPANY

4.1. The Process of Incorporation

- There are two key stages: the application stage, and the registration stage.

- Rules governing incorporation are contained in Part 2 of the CA 2006. The foundational
principle of incorporation is set out in section 7(1):

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