Company Law Topic and Lecture Notes PDF

Summary

This document provides lecture notes on company law, covering topics like the separate legal entity principle and directors' duties. It includes summaries, case studies, and commentary on relevant legal principles, making it a valuable resource for students. The notes were compiled from various textbooks and websites, and the author encourages paraphrasing the material to avoid plagiarism.

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Company law Topic and Lecture notes By Kaazim Fleary LLB (Hons) Notice of Credit and Plagiarism disclaimer These notes were compiled by the use of various textbooks and websites. The author gives all credit to the authors of the Textbooks and we...

Company law Topic and Lecture notes By Kaazim Fleary LLB (Hons) Notice of Credit and Plagiarism disclaimer These notes were compiled by the use of various textbooks and websites. The author gives all credit to the authors of the Textbooks and websites used in the compilation. All users of these notes are advised to paraphrase all material herein for the sake of avoidance of plagiarism. The author of this document takes no liability for any instances of plagiarism endured by users of this document. By the use of this document, the user has agreed to the Page 1 of 68 terms set out therein. These notes are the intellectual property of Kaazim Fleary and are not to be shared without prior authorization. Table of Contents Company law Topic and Lecture notes............................................1 Topic 1 – Separate Legal entity- Principle of Corporate Personality. 7 Summary...........................................................................................................7 Adams v Cape Industries Plc.......................................................................8 VTB Capital v Nutriteck...............................................................................9 1A. Introduction................................................................................................9 Salomon v Salomon..................................................................................10 B. The vail of incorporation.............................................................................11 1.B.i Consequences of the vail of corporate personality (the vail of incorporation)..............................................................................................12 1. The company has he perpetual existence/succession -a life of its own..12 Re Noel Tedman Holding..........................................................................12 2. The company has a contractual capacity...............................................13 Lee v Lee Air Farming...............................................................................13 3. The Doctrine of Sperate ownership of property.......................................14 Macaura v Northern Assurance...............................................................14 C. Piecing the Corporate Vail...........................................................................14 Gilford Moto Company v Horne and Another..........................................15 Commentary.....................................................................................................15 Jones v. Lipman 1 WLR 832...........................................................16 COMMENTARY..................................................................................................16 Donovan Crawford v Financial Institutions Services Ltd UKPC 13 16 NOTE- Agency..............................................................................................17 Page 2 of 68 Smith Stone & Knight Ltd v. Birmingham Corporation 4 ALL ER 116..................................................................................................................17 COMMENTARY..................................................................................................19 The Agency Principle and Group Companies......................................................19 The Single Economic Unit...............................................................................19 DHN v Tower Hamlets..............................................................................20 COMMENTARY..................................................................................................21 The Albazero 1977 AC 807........................................................................22 The critique of DHN...........................................................................................22 D. Establishing the Principle for lifting the Veil...............................................23 Adams v Cape Industries Plc.....................................................................23 NOTE.................................................................................................................23 i. Corporate structure a device used to evade a limitation imposed on conduct by law.............................................................................................25 NOTE.................................................................................................................25 ii. Corporate structures as a device to evade rights of relief already possessed by third parties............................................................................26 Trustor AB v Smallbone............................................................................26 NOTE- Intrest of Justice point............................................................................26 Re A Company 1985 BCLC 333..................................................................27 VTB Capital v Nutritek..............................................................................27 The corporate structure used as a device to evade the right of relief a third party may have in the future.......................................................................27 COMMENTARY..................................................................................................28 Manoeuvring the Corporate veil with traditional legal principles...............28 Prest v Petrodel 2013 UKSC 34.................................................................28 COMMENATRY..................................................................................................29 The Case breaks no new legal ground................................................................29 Page 3 of 68 Akhmedova v Ackmedova 2018 All ER 213..............................................31 Urban Development Corp v Jacitiar..........................................................31 Chandler v Cape 2012 EWCA 525............................................................31 OVER ALL COMMENTARY..................................................................................32 Topic 3 – Director’s duties.............................................................33 Summary.........................................................................................................33 Who and what is a director.............................................................................34 3.1 Introduction...............................................................................................34 3.2 Definition of Director................................................................................35 Who is a director?........................................................................................35 3.3 De facto, De jure directors and Shadow Directors...................................35 A. De facto Directors....................................................................................36 Re Hydro-dam 1994..................................................................................36 Energetics Plc v Hazarika..........................................................................37 Holland v IRC.............................................................................................37 B. Shadow Directors.....................................................................................37 Secretary of State for Trade and Industry v Devrell 2001........................38 NOTE- Difference between a shadow director and de facto directors........39 Re Hydro-dam 1994..................................................................................39 Summary of who is a director.........................................................................39 3.4 The board of directors and the duties imposed.......................................40 Section 60 – The Management Mandate.................................................40 Commentary.....................................................................................................40 Statutory fiduciary and non-fiduciary duty.....................................................41 Section 99 – Director's Duties...................................................................41 Commentary on section 99................................................................................42 Page 4 of 68 Unanimous shareholder agreement...............................................................43 Section 137(2)...........................................................................................43 Commentary on section 137(2)..........................................................................43 3.4. A- The non-fiduciary duties of the directors under 99(1)(b).................43 Section 99(1)(b)........................................................................................43 The test........................................................................................................44 The subjective and objective test for 99(1)(b)....................................................44 Re City Equitable Fire Insurance...............................................................44 The Common Fools Defence..............................................................................45 Re brazilian rubber plantations................................................................45 The delegation of the Duty of care and reasonable skill.....................................47 Re Barings PLC 1999 BCLC 433.................................................................47 Re Park House Properties Ltd 1998 BCC 847............................................49 Breaches of the Duty of Skill, Care and Competence standard...........................50 Application of the subjective and objective test.............................................50 Re D’Jan of London Ltd BCLC 561..................................................50 Re Continental Assurance Co of London 1997 1 bclc 48..........................51 University of Trinidad and Tobago v Kennet Julien..................................51 Peoples Department Stores Ltd v Wise (1992).........................................52 The Fiduciary duty in 99(1)(a).........................................................................53 The Duty of Honesty........................................................................................53 Section 99(1)(a)........................................................................................53 Duties Owed to the Company......................................................................53 Duties Owed to the Company – section 99(2)....................................................53 Section 99(1).............................................................................................53 Section 99(2).............................................................................................54 Section 99(3).............................................................................................54 Page 5 of 68 Commentary on the statue................................................................................54 Percival v Wright 2 Ch 421............................................................55 Overriding nature of the Duty......................................................................55 Re Smith & Fawcett Ltd Ch 304.....................................................55 Dawson International plc v. Coats Paton plc BCLC 560................56 Extent of the fiduciary duty..........................................................................56 Duty to avoid conflict of interest.................................................................56 Aberdeen Rly Co v. Blaikie Bros.....................................................56 Phillip Towers v Premier Waste Management 2011 EWCA 124..............58 NOTE.................................................................................................................59 Non Profits...................................................................................................59 Cook v Deeks.................................................................................60 Regal (Hastings) Ltd v. Gulliver 2 AC 134n, 1 All ER 378...60 A company Unable to secure an opportunity.....................................................61 Industrial Developments Consultants v. Cooley 2 All ER 162........61 Island Export Finance Ltd. v. Umunna BCLC 460...........................62 Bhullar v Bhullar 2003 EWCA 424...........................................................63 CMS Dolphin v Simonet 2001 2BCLC 704.................................................63 Section 93 Safe Harbour – Discloser of interest...........................................64 Section 93- Intrest in Contracts................................................................64 NOTE ON THE SECTION......................................................................................64 When is disclosure required..............................................................................65 Dimo Holdings v Jaeger Development......................................................65 Zysko v Thorarinson..................................................................................65 Gray v New Augarita Porcupine Mines....................................................65 Exide Canada Inc v Hilts............................................................................66 Who must disclose............................................................................................66 Page 6 of 68 Nature and extent of disclosure........................................................................66 Gray v New Augarita Porcupine Mines....................................................66 Time of Disclosure.............................................................................................67 Effect of disclosure and Effect of Non-disclosures...................................................68 Topic 1 – Separate Legal entity- Principle of Corporate Personality Summary What is a separate corporate personality Salmon v Salomon is the case that gives birth to the notion that a company is separate and distinct from its owners and managers. This notion is known as a separate corporate personality. The principle of separate legal personality incorporates two concepts 1. The notion that a company in incorporation acquires a personality of its own 2. The notion that this personality is separate and distinct from the owners and managers of the company The Veil of incorporation To allows for the notion of separate corporate personality, the law creates a veil of incorporation which is drawn between the company and its owners/mangers. This allows the company to enjoy all the benefits of incorporation and shields the shareholders from liability they would have otherwise will fall on them. Consequences of the veil of incorporation 1. A company has perpetual existence – Re Tedman Holdings 2. A company has contractual capacity- Lee v Lee Air Farms Page 7 of 68 3. A company could own its own property and assets – Macaura v Northern Assurance Piercing the Veil of incorporation The Veil of incorporation can be pieces where this is used as a device to evade limitations imposed on an individual’s conduct by law. The court will lift the veil, where it will allow an individual to use the corporate to allowing the individual to evade liability that would otherwise fall on them. - Gilford Moto Company v Horn; Jones v Lipman NB- these cases did not provide the above principle expressly/ Agency The agency argument can exist to defeat the Salomon v Salomon principle (Smith Stone and Knight) but it is to use in limited cases Agency in relation to group companies The court is entitled to piece the veil of incorporation whenever a group of companies is involved, but such a decision will be based on the ‘facts of the case’ (Shaw LJ) and “not every case where a group of companies is involved one is entitled to piece the vail’ (Goff LJ) – DHN v Towe Hamlets Lord Denning said that where a group of companies was in law a single economic unit, the law ought to treat the unit as one. It was possible to ignore the principle of separate corporate personality in a group context, as the reality of corporate groups should be viewed as a single economic unit. Lord denning views were held to be an improper line of argument. Such was expressed in Adams v Cape plc and The Albazero. Establishing the Principle of lifting the veil NB- It was not until Adam v Cape Industries and Prest v Pretordale, did the court give a clear principle on the circumstances where the corporate veil could be lifted. However, these authorities did not expressly say which of the previous cases are good law and which are bad law. Page 8 of 68 Adams v Cape Industries Plc This case looked at the previous cases and held that the veil of incorporation should not be likely pieced and should only be lifted in exceptional cases. The court established two circumstances in which this can occur 1. where the corporate structure is used as a device to evade limitations imposed on an individual’s conduct by law. The court affirmed the cases of Jones v Lipman and Gilford Moto Company v Horne, and where as previously the courts in those cases used colourful language in their judgement, without a clear principle, the court in Adams v Cape established a clear principle. 2. where the corporate structure is used as a device to evade rights of relief already possessed by a third party. The court looked at Trustor AB v Smallbone. This limb can be referred to as the fraud limb Intrest of justice argument The court in Adams v Cape and VTB Capital v Nutriteck, disapproved this argument as a legitimate ground for lifting the veil. As a results Re A company 1985, was called into question. VTB Capital v Nutriteck. Lord Nueberger- while the court may piece the veil in certain circumstances to defeat injustice, the court cannot piece the veil in the interest of justice alone, to do so would be unprincipled and will give rise to great uncertainty and inconsistency. 1A. Introduction. The fundamental principle of company law was established by the house of lords in Salomon v Salomon. That is on incorporation the company becomes a legal entity separate and distinct from its shareholders and it is not the agent of those shareholders not even if it is a one-man company with one shareholder controlling all its activities. 1. The principle of corporate personality is that the company possesses an illegal personality that is separate and distinct from its members (owners, Shareholders). This corporate personality is created at the moment of incorporation. Page 9 of 68 2. On incorporation the law provides that a vail is created known as a corporate vail which shields those behind the vail that is the managers, the directors and shareholders, from liability that would otherwise fall on them. This is done, as Francis Palmer in ‘Private Companies their Formation and Advantages’, says that the vail of incorporation is necessary to allow a business person to escape the tyranny of unlimited liability An important case to note is that of AG v Antigua Times Ltd, which established that a company can claim to enjoy all the relevant fundamental rights enshrined in modern CC constitutions. Salomon v Salomon. Rule - Once a company is duly incorporated, it must be treated as any other individual with rights and liabilities of its own. Facts Mr salmon sold his business, a boot manufacturing business to a company which he had set up, following all the procedures and formalities under the 1862 Company Act. The Company (Salomon Ltd) was incorporated with members comprising of Mr. Salomon and his family. The price of the sale to Mr. Salomon was by way of shares and debentures, to the value of €10,000, having a floating charge (security against debt) on assets of the company. This meant that Mr. Salomon was a creditor of the business, with first claim to the company assets, should it become insolvent. After the company went into liquidation, Mr Salomon claims stood prior to that of the unsecure creditors. These creditors brought a claim of fraud against Mr Salomon. The unsecure creditors alleged that the company was a sham and Mr Salomon was essentially an agent and being the principle, was personally liable for the company’s debt. The question was where the liquidator could get to salmon assets, ie was there in fact a separate cooperate person. The court of appeal agreed with the first instance court that the company was a fraud on Mr Salomon creditors, however on appeal to the House of Lords, overturned the CA decision. Page 10 of 68 Held- The court held- the company had been duly formed and registered and was not a mere agent of Mr Salomon. The court concluded that there was no sham or fraud, and Mr Salomon was not personally liable for the company’s debt. Lord Macnagthen stated “when the memorandum is duly signed and registered, a corporate body is formed and its status cannot be lost by issuing the bulk of its shares to one person.” That is to say, if a company which is duly incorporated, is precisely the same as it was before, and the same person manages and receives the profit, the company is, in law, not an agent of them. Once a company is duly incorporated, it must be treated as any other individual with rights and liabilities of its own. COMMENTARY Under the UK statute, an incorporated company needs seven shareholders. In this case, Mr Salmon gives shares to his wife and children to hold as nominees for him, and he also keeps a proportion of the shares. On the face of it, he owns satisfy the requirement for having 7 shareholders, but he is the beneficiary owner of all the shares in reality. In the Court of Appeal, Lord Justice Lopez and page 341, said that the company act contemplates the incorporation of seven independent Bona Fide shareholder, who has a mind and will of their own and was not mere puppets of an individual adopting the machinery of the activities carried on his old business in the same was as he did before when he was a sole trader On the facts of salmon, there are not seven distinct shareholders. The appeal is allowed in favour of salmon The house of lords holds that the company had been duly incorporated and it was not the mere agent of Mr Salmon. And Mr salmon was allowed to rely on the principle of separate legal personality. The court could not lift the corporate vale to find Mr Salmon liable for the debts of the company Page 11 of 68 B. The vail of incorporation Frances Palmer stated that the feel of incorporation is to allow businesses to escape the tyranny of corporate liability. 1.B.i Consequences of the vail of corporate personality (the vail of incorporation) As a legal entity, separate and distinct from the shareholders, the company must be treated like any other independent person with rights and liabilities (Salomon v Salomon, per Lord Halsbury) 1. The company has he perpetual existence/succession -a life of its own The veil off incorporation is created on the incorporation of the company. The perpetual existence refers to the continuous existence of a company, and involves the understanding that a company is immortal and the legal existence of the company is separate from the owner. That is to say the existence of the company is not constrained by flesh and Bones. The case on point is Re Noel Tedman Holdings The company will continue to exist unless it is properly wound up or struck off the register. The status of the company survives is perpetual, and there is no effect on the company b the death or insolvency of its members. Re Noel Tedman Holding This case clarifies that even in case of death, of all the members of the company, the company will still exit. The Perpetual Existence of the company contributes to the company’s stability as well as long life Facts- In this case the directors and the shareholders all died in a traffic accident. The court held that a company by incorporation is able to survive the death of all its shareholders. Since there were no directors, the court decided to appoint new directors. However, members were required to vote for their appointment and the company had no members. The court then decided to allow personal representatives of the deceased to appoint new directors that could assent to the transfer of the shares Page 12 of 68 2. The company has a contractual capacity The company has a contractual capacity which is distinct from the contractual capacity that exists by shareholders. Therefore a company can make a contract with its shareholders and employees. Lee v Lee Air Farming Rule- The company as a separate legal entity, has the capacity to contract with other, even directors or members of the company Facts- The appellant's husband, had formed the respondent company for the purpose of carrying on the business of aerial top-dressing, and was the controlling shareholder of the company. By its articles of association, he appointed governing director and employed at a salary as its chief pilot. In his capacity as governing director and controlling shareholder, he exercised full and unrestricted control over all the operations of the company. Pursuant to the statutory obligations the company had insured itself against liability to pay compensation in the case of an accident to him. While piloting an aircraft belonging to the company in the course of aerial top-dressing operations the aircraft crashed and he was killed. The appellant sued the company alleging that at the time of the accident her husband was a "worker" employed by the respondent company within the meaning of the Workers' Compensation Act, 1922, as amended. The company’s insurance claimed that Lee was not an employee of the company, as he had made a contract with himself. Naturally, the question arose as to whether he was a ‘worker’ for the company within the meaning of New Zealand worker compensation legislation. Held, that the deceased was a "worker" within the meaning of the Act, and he had not contracted with himself. His position as a sole governing director did not make it impossible for him to be a servant of the company in the capacity of chief pilot, for he and the company were separate and distinct legal entities which could enter, and had entered, into a valid contractual relationship, which was not invalidated by the circumstances that the deceased was the sole governing director in whom was vested the full government and control of the company and also the controlling shareholder. Page 13 of 68 The court granted the widow compensation. 3. The Doctrine of Sperate ownership of property. Rule- The company is capable of owning its own property, which is separate and distinct from what is held by the directors and shareholders. Macaura v Northern Assurance. Facts- The appellant Mr Macaura, owned several timber estates in Ireland. He later transfers the timber and the estate to a company in which he was the beneficial owner. However, the insurance for the timber was in his name and not in the name of the company and the timber was subsequently destroyed by a fire. Macaura sought to claim the insurance policy. The question before the court was whether he had an insurable interest in the property of the company, given that he was the beneficial owner of all the shares. Held- The house of dismissed the appeal, applying the Salomon Principle, held that he had no insurable interest in the property of the company. The court stated that in order to have an insurable interest in the property, a person must have a legal or equitable interest in that property. Thus the claim failed as the timber was the property of the company and not Mr. Macaura. As Lord Wrenbury puts it “the corporation even if he holds all the shares is not the corporation… neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.” C. Piecing the Corporate Vail The courts in Salmon struggled to arrive at the eventual decision, with both the court of appeal and the first instance court holding that the doctrine of separate corporate personality was not a legitimate end of the company Act. The House of lords held that it was Page 14 of 68 a legitimate consequence of what was provided in the old company act. Question no is the law after salmon settle. The issue was not settled Gilford Moto Company v Horne and Another. Rule – The Vail of incorporation can be pierced, where it is used as a device or corporate structure to evade limitations imposed on an individual’s conduct by law. Facts- The Plaintiffs, Gilford’s Moto Company, assemble and sold moto cars. It employed Mr Horn, whose contract of employment, there as a non-competition clause that Mr Horne will not engage in any competing business in a three-mile radius, for five years, after he might leave the company. This undertaking, by him, was said to be given for himself either solely or jointly with others, or as agent for any other person firm or company. Mr Hone after his employment, established a competition company, within the three-mile radius, and within the five years. The company sued for breach of the non-competition clause. Held – in the house of Lords, Lord Hanworth, noted that Mr Horns argument rested on the principle of separate corporate personality. His argument was that it was his company that was in competition with Gilford Moto Company, and that he was separate and distinct from his company. The House of Lords was not impressed with that argument, reasoning that Mr Horne had formed the company, as device, a stratagem, a mask to prevent Gilford from seeing the true owners of the company. The purpose of incorporation was to try to enable Mr Hone, under what is a cloak or shame to engage in business. The HOL held that Mr Horne had breached his non-competition agreement with Gilford Motors and he had done so, as his promise of a non-compete either solely or jointly with, but also as an agent for another person, firm or company. Commentary Mr Horn in an attempt to evade his contract law obligation, he sought to take advantage of separate corporate personality, to de exactly what he was prohibited from doing. He argue Salmon v Salmon, in that he claimed that that it was his company that was in competition with Gilford Moto Company, and that he was separate and distinct from his company. Page 15 of 68 None of the judges referred to Salmon or used the phrase piercing the corporate veil, but in particle effect of holding Mr Horne personally responsibly, the court in practice pierce the veil of incorporation. The court is saying, some 40 years after Salmon, the veil of incorporation can be lifted, where allowing the individual to use the corporate form to have the necessary effect of allowing the individual to evade a liability that would otherwise fall on them. Jones v. Lipman 1 WLR 832 Fact- Lipman agreed to sell land to Jones, but before the sale is complete, Lipman changes his mind. In an attempt to evade an order of specific performance, he transfers the land to a company which he sets up and controls. He argues that he was no longer the owner of the property and therefore he could not transfer ownership to the plaintiff. The Plaintiff sues for Specific performance Held- The court of Appal held that the company is a creation of Lipman, a device, a sham, a mask, that he holds before his face in an attempt to avoid recognition by the eye of equity COMMENTARY The language used in Lipman is similar to that of Gilford Motors. However, the language does not tell us very much. As in Gilford, the court in Jones and Lipman does not attempt a general principle, which will guide the action of the court when an argument is brought on the bases of Salomon, that the principle of separate corporate personality should apply. The court is saying that the corporate form has been used in circumstances where it was not permitted to do so. Donovan Crawford v Financial Institutions Services Ltd UKPC 13 The Privy council in this case, uses the language used in Gilford Moto Company and Jones v Lipman, - that is Sham, Mask, using the corporate form before his face, in an attempt to avoid recognition by the eye of equity. Page 16 of 68 NOTE- Agency As Gilford Moto Company does not expressly provide a principle, it can be inferred the principle is that if the individual and the company are involved in an agency relationship, the company will be responsible for the actions of the Agent. In the corporate context, an agency relationship can arise to make the company the principal, in respect of actions taken by its shareholder, so that the company as principal, is liable for the actions of the shareholder. The problem is that Salmon establishes that the mere fact of incorporation does not cause an agency relationship to be created between the company and its members. If it did, on the facts of Salmon, it would have destroyed powerful effects corporate sperate personality, as there was no question of agency on the facts, as it was said that Salmon was an agent of the company Smith Stone & Knight Ltd v. Birmingham Corporation 4 ALL ER 116 The court struggled with the contention that the mere fact of incorporation does not give rise to an agency relationship. Rule – If an agency relationship existed, the veil of incorporation can be pieced as the parent will be responsible for the actions of the subsidiary. Facts- Smith Stone and Knight was a company which manufactured paper. It acquires a partnership that is involved in the wastepaper business. A subsidiary company is then set up to run the waste paper business. The profits of the subsidiary were treated as profits of the parent company. Smith Stone and Knight, retains ownership of the land upon which the subsidiary begins to operate. The land is then acquired by the Birmingham City Corporation. The question is, who is entitled to payment for the company's acquisition of the land. Smith Stone and Knight contents that they are entitled to the payment, and the Corporation says that because the subsidiary was a separate entity, it should receive the compensation. Page 17 of 68 Held- The court on these facts, and the finds in Salomon v Salomon holds that the subsidiary, that the mere fact of incorporating a company, does not in and off itself, give rise to an agency. The court, however, found that the subsidiary, on the facts of this case was the agent of Smith Stone and Knight and that they were entitled to recover the compensation. Reasoning Atkinson J stated that the overall question of whether the subsidiary was carrying on the business as the parent’s business or its own was a question to be determined from the factual circumstances. To answer this question six factors must be taken into account. (i) whether the profit of the subsidiary were those of the parent company; (ii) whether the persons conducting the business of the subsidiary were appointed by the parent company; (iii) whether the parent company was the ‘head and brains’ of the trading venture; (iv) whether the parent company governed the adventure; (v) whether the profits made by the subsidiary company were made by the skill and direction of the parent company; and (vi) whether the parent company was in effective and constant control of the subsidiary. Application of the Case The approach advocated by Atkinson J, was applied in the English court of Appeal Case of J H Rayner (Mincing) Ltd v Department of Trade and Wallersteiner v Moir. In Wallersteiner v Moir, Lord Denning stated that - It is clear that Dr. Wallersteiner used many companies, trusts, or other legal entities as if they belonged to him. He was in control of them as much as the ‘one-man company’ is under the control of the one man who owns all the shares and is the chairman and managing director. He made contracts of enormous magnitude on their behalf on a sheet of notepaper without reference to anyone else... He used their sums of money as if they were his own. Page 18 of 68 I am quite clear that they were just the puppets of Dr. Wallersteiner. He controlled their every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of them. Transformed to legal language, they were his agents as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures – for whose doings he should be, and is, responsible. COMMENTARY On the facts of this case, as it was in Salomon v Salomon, no expressed agency agreement. In spite of that, the court found that they had been an agency. The text will say that cases like this are rare. In the case of Adams v Cape Industries plc, the court stressed that in the absence of an expressed agency agreement, an agency relationship will seldom exist between a parent and its subsidiary, as simply owning a majority or all of the shareholding in a company, will not by itself establish a relationship of agency. The court in Smith Stone and Knight found that an agency relationship exists despite the presence of an agency agreement. Going back to Gilford Moto Company, it was understood that the company will be liable for the actions of the agent. The Agency principle can exist to defeat the Salomon v Salomon principle, but its use is limited to cases that according to Adams v Cape, are rare. The Agency Principle and Group Companies The question is whether the agency principle helps in the determination of whether the vial of in operation, ought to be lifted in the context of group companies. The governing law is Adams v Capes and DHN v Tower Hamlets The Single Economic Unit Page 19 of 68 DHN v Tower Hamlets Rule- The court is entitled to pierce the corporate veil whenever a group of companies is involved This is the leading case that supports the single economic unit agreement. In this case, the court confronted a problem that was similar to the issue in Smith Stone and Knight. Facts- DHN Food Distributors carried on business as grocery and provision merchants. The premises from which the company traded were owned by a wholly owned subsidiary of the company, Bronze Investment Ltd. This subsidiary carried out no business activity. The legal status of DHN and Bronze, was that DHN was a mere licence of Bronze. The business premises of DHN Food Distributors Ltd was compulsorily acquired by Tower Hamlets London Borough Council and a sum of money for the purchase was paid to Bronze as the owner of the land. DNH, could not find alternative premises, and the company was wound up, and in such a case, the holder of a legal or equitable interest in the land was entitled to receive compensation for disturbance to its business. The question became, was DNH, the legal or equitable owner of the land, as if it was, it would have been entitled to receive compensation. Held- the courts held that DHN was entitled to compensation for disturbance to the business caused by the compulsory purchase of the land. The Court of Appeal said that DNH was entitled to the property as an equitable owner of the property, which was destroyed by a compulsory purchase. And this was a higher base for compensation, than what would have been generally given. The court found that the subsidiary was bound, hand and foot to the parent company. The group is virtually the same as a partnership, where all three companies are partners. The company should, for present purposes should be treated as one, and the parent company, DHN, should be treated as that one. Page 20 of 68 Although the court was in uniformity that DHN was entitled to the compensation the way the court arrived at such a conclusion, was by different roots. Lord Denning said that was a group of companies was in law a single economic unit the law ought to treat the unit as one. However the other judges used, the rear finding of agency to arrive at the conclusion. NB- although the other judges used the less controversial approach, the agency approach is not free from issues, as it had been known that such is not an approach the courts will look kindly on, but is still recognized a line of legitimate argument. COMMENTARY This allowed DNH, to be entitled to receive substantially more compensation, than what was paid to Bronze, as Bronze business was not disturbed. The case is a controversial one, but having said so, it is one that can be said with a strong measure of confidence, one that will not be followed today. However, the reason of the case is important. The reasoning of the court could easily be interpreted as suggesting a principle that the court is entitled to pierce the corporate veil whenever a group of companies is involved. However, both Goff LJ and Shaw LJ made it plain that they were not basing their decision on any such principle. In this regard, Goff LJ stated that he ‘would not at this juncture accept that in every case where one has a group of companies one is entitled to pierce the veil’ and Shaw LJ indicated that he was basing his decision on ‘the facts of the case Had Lord denning adopted that approach, DNH may have been on the same footing as Smith Stone and Knight, (the agency approach lifting the veil in rare cases) however the single economic principle adopted by Denning, has brought it into scrutiny, as such is not a line of argument. The authority of The Albazero 1977, demonstrates that point Page 21 of 68 The Albazero 1977 AC 807 The court holds that each company, in a group of companies is a separate legal entity possessed of separate legal rights and liabilities. NOTE This case of DHN is now held to be flawed and of limited authority, as the authority is only relevant for the agency argument but fort by the other two judges. DNH, has not been overruled, the court has said that the case has to be treated on an element of caution, as it is unclear as to what is the bases for the granting of the compensation, ie was it the single economic unit proposed by Denning, or on the Agency argument put forward by the other judges. Thus this case, as the agency argument is the only accepted legal argument, is an out layer, just as that of Smith Stone and Knight. The critique of DHN. DHN Food Distributors was closely considered by the Scottish House of Lords in Woolfson v Strathclyde Regional Council when the single economic entity argument was advanced with reliance on the DHN Food Distributors. The Court in Woolfson v Strathclyde Regional Council had considerable doubt about the suggestion in DHN, that the court can pierce the corporate veil whenever a corporate group was involved. Lord Keith stated the true principle to be that ‘it is only appropriate to pierce the corporate veil where special circumstances exist indicating that it is a mere façade concealing the true facts’. He also expressed doubt as to where this principle was correctly applied in DNH, and explained that DNH, turned on its own facts. The courts in Adams v Cape Industries plc confirmed the conclusion in Wolfson v Strathclyde Regional Council that the Court of Appeal decision in the DHN food Distributors was an aberration. Adams v Cape also affirms the principle that ‘each company in a group of Page 22 of 68 companies... is a separate legal entity possessed of separate legal rights and liabilities’ which is ‘now unchallengeable by judicial decisions D. Establishing the Principle for lifting the Veil. This was a Scottish House of Lords Case, Woolfson v Strathclyde Regional Council, Lord Keith asserted that the court should only depart from a strict observance of the Salomon principle and piece the veil of incorporation where special circumstances exist indicating that the company is a mere façade concealing the true facts. In the leading English Court of Appeal Case, of Adams v Cape Industries plc, Slade LJ accepted the mere façade test and the court stated that it was ‘one well-recognised exception to the rule prohibiting the piercing of the “corporate veil” It was also noted in Adams v Cape, that the ‘façade’ encapsulated the medley of epithets 47 which were used in earlier cases as justification for the courts lifting the veil, however, that epithets provided ‘sparse guidance’ as to the principles which should guide the court in applying the façade test Adams v Cape Industries Plc The court of Appeal reviewed a number of previous decisions, as agreed with Lord Keith in Woolfson v Strathclyde Regional Council, that the veil of incorporation should only be lifted in exceptional cases. The court in Prest v Pretrodle agreed with the court in Adams v Cape and reaffirmed the principle that the veil of incorporation should not likely be pierced. The court in established two circumstances in which it would have been appropriate to lift the corporate veil. The courts established two types of cases where validity should be lifted. That is when the defendant attempts to use the corporate structures as a device to evade; 1. limitations imposed on his conduct by law 2. rights of relief already possessed by third parties NOTE The court noted that the veil cannot be lifted where the corporate structures were used as a device to evade the right of relief the third parties may acquire in the future. Page 23 of 68 Facts- A corporate group, was engaged in three types of activity involving the use of asbestos, there were companies within the group that was involved in mining, others in marketing its use and the third type of activity was involved in the sale of the asbestos. Cape Industries PLC, the parent company, holds a number of these subsidies, which are involved in all three types of activities. The parent is based in England, the mining is done by a subsidiary in South Africa, and the marketing done by two companies, NAAC, which is based in the United States and Capasco is based in England. The asbestos was sold in Texas, and persons developed a medical conditions caused by exposure to asbestos. A number of actions are commenced against Cape, NAAC and Capasco. The initial actions were compromised by an out of court settlement of 20 million dollars. CAPE, then decides to place NAAC into liquidation, and form a new company, CPC, to continue the equivalent functions of NAAC. The new company is not a subsidiary of Cape Industries, thus not being part of the corporate group, but does receive financial support from Cape Industries. Additional proceedings are brought against Cape industries and its UK subsidiary Capasco. A US court ordered that damages of a further 15 million settlement, against Cape industries and Capasco. The Only way this Order by a US court could be properly justified, was if Cape Industries and Capasco, are both present in the US to establish jurisdiction. The claimant argued that Cape and Capasco was present in the US through their subsidiaries, that is NAAC and CPC. For this argument to succeeded, the separate corporate personalities of the respective companies, would need to be lifted, as all the companies would need to be treated as one entity. The claimant made for the argument 1. Cape and it subsidies should be treated as a single economic unit, relying on DHN v Tower Hamlets 2. the use of the separate corporate personality was a fraud or a sham, in the manner applied by analogy in Gilford Motors v Horne (setting up a company to do what was forbidden) Page 24 of 68 3. An agency relationship exist between Cape and its subsidiary, as if an agency relationship existed, the parent will be liable for the actions of its subsidiaries. They relied on the authority of Smith Stone and Knight. 4. the veils should be pieced in the interest of justice. Held- All four of the argument failed. The court of appeal strongly reaffirmed the principle in Salomon. It states that the corporate veil is not likely to be interfered with and can only be lifted when the defendant by the device of a corporate structure, i. has attempted to evade limitations imposed on his conduct by law ii. or attempts to defeat rights of relief against him, that third parties already possess. i. Corporate structure a device used to evade a limitation imposed on conduct by law The Court of appeal in Adams v Cape, accepted that this condition entitled the court to lift the veil of incorporation, and in doing so cited with approval the cases of Jones v Lipman and Gilford Motor Company v Horne as examples where the courts lifted the veil in these circumstances. NOTE the cases of Jones v Lipman and Gilford Moto Company, the language in the case was ‘colourful’ with no stated principle. The Court of Appeal in Adams v Cape, thus accept these cases and establishes the principle that if an individual uses the corporate structure as a device to evade a limitation imposed on his conduct by law, the veil of incorporation can be lifted. Page 25 of 68 ii. Corporate structures as a device to evade rights of relief already possessed by third parties. This limb of the test can be described as the fraud limb. In Trustor AB v Smallbone, represent an good example of this principle. Trustor AB v Smallbone Facts- £39m had gone missing from the claimant company. £20m of the missing sum ended up in I Ltd, a company which was a one-man company owned by Smallbone, the managing director of the claimant company. In order to pursue its claim against Smallbone for the £20m which belonged to it, the claimant company sought to pierce the corporate veil to establish that receipt by I Ltd was receipt by Smallbone. Held- applying the test laid down in Wolfson, the court held that I Ltd was a device used for the receipt of the claimant company’s money which had been misapplied by Smallbone. The court lifted the veil, holding that the corporate structure will not be permitted to be used as a device to evade a right or relief, already posed by third parties. Sir Andrew Morritt V-C identified three suggested categories of cases in which it may be appropriate to pierce the corporate veil, including (1) cases in which the company was shown to be a facade or a sham, and (2) cases where the company was involved in some impropriety, and (3) where it is necessary to do so in the interests of justice and no unconnected third party is involved. NOTE- Intrest of Justice point The Court in Admas v Cape, held that the interest of justice argument for the lifting of the veil was not a valid reason for lifting the veil. Page 26 of 68 The court, in this respect, expressed some doubt Re A Company 1990 Re A Company 1985 BCLC 333 Facts- The defendant created a network of English and foreign companies. There were all created to hold his personal assets. The court of appeal held that a freezing order could be granted against those assets. Lord Justice Cummings Bruce- the court will use its powers to piece the corporate veil if it’s necessary to achieve justice, irrespective of the legal efficacy of the corporate structure under consideration. VTB Capital v Nutritek This case reaffirms the position in Adams v Cape Industries. Lord Nueberger, stated that, although it may be right for the veil to be pieced in certain circumstances to defeat injustice, the court cannot pierce the veil of incorporation in the interest of justice alone, as so vague an approach, would be unprincipled and will give rise to great uncertainty and inconsistency The corporate structure used as a device to evade the right of relief a third party may have in the future. The court in Cape stated that 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 so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right to use the corporate structure in this way is inherent in our corporate law... in our judgment, Cape was in law entitled to organize the Page 27 of 68 group’s affairs in that manner and... to expect that the court would apply the principle in Salomon v Salomon AC 22 in an ordinary way. COMMENTARY In Adams v Capes Industries, the court felt that the two aforementioned conditions would suffice, in exhausting the categories of cases in which the veil of incorporation could lawfully be lifted. Manoeuvring the Corporate veil with traditional legal principles. Prest v Petrodel 2013 UKSC 34 Unlike Adams v Cape Industries Plc, this was a decision of the UK Supreme Court, from the House of Lords. Facts- The case involved a matrimonial property dispute. The wife sought an order for the transfer of ownership of eight residential properties, including the matrimonial home, and legal title, which was vested in two companies. The companies were either wholly owned or had effective control by the husband. The ownership of the properties in question was vested in the companies before the breakdown of the marriage and there was no evidence that by the act of vesting ownership of the properties in the company was an act to evade any obligations to his wife in connection to the divorce proceedings. The court of appeal held that the lower courts had no power to piece the corporate veil, on the facts of the case. The Supreme court was thus asked to consider where the veil of incorporation should be lifted to allow the transfer of the asset to the wife. Held- The court, that on the facts of the case, the corporate veil could not be pieced, but nevertheless, the wife's appeal was allowed and ordered the transfer of assets, based on the beneficiary interest the husband held in the properties. Reasoning – Page 28 of 68  The court agrees that this was not an appropriate case for piecing the veil, agreeing with the court of appeal  The assets were transferred to the wife because Mr Prest had treated the company assets as his own. This however did not justify a court in piecing the veil  The appeal was allowed on the grounds that the companies held the property for Mr Prest, on a resulting trust for Mr Prest. Thus notwithstanding the fact of company ownership, Mr Prest was the beneficiary ownership o Nb- a resulting trust is where an individual conveys the title to the property to another person, however, there is a presumption that the individual holds the intention to retain the beneficial interest of the property either wholly or partially. COMMENATRY The court achieves the same result as if the veil was pieced, without piecing the veil. The supreme court was a full sitting of 11 justices. This suggests that the doctrine of separate corporate personality is one that is firmly entrenched. The court in this case came to a unanimous decision The Case breaks no new legal ground. Like Admas v Cape, there analysed previous cases where the courts have considered the piecing of the veil. The court in Prest concluded that while there were circumstances in which the court could disregard the corporate veil these circumstances would rarely arise. The veil in this case is strong, there is no attempt to conceal or evade legal liabilities as a result of the breakdown of the marriage. It was set up for legal purposes. The fact that the companies were treated by the husband as his, was not enough in and of itself. The court did not piece the veil but stated that the husband owns the assets, as the company holds the assets as a trust of the husband. Page 29 of 68 The decision is facts specific, had the assets been used for the benefit of the company, the outcome may have been different. Per Lord Nueberger The discussion of separate corporate personality must begin with the decision in Salmon v Salmon, where a unanimous house of Lords arrives at a clear and principal decision, which has stood unimpeached for over a century, but traditional legal principles also apply Per Lord Sumption The principle of the corporate veil is in fact well establishes in the law, and the idea that the corporate veil may be pieced only to prevent the abuse of corporate legal personality is all so well entrenched. It may be an abuse of the separate legal personality of a company to evade the law or to frustrate its enforcement (reaffirming Adams v Cape) It is not an abuse to cause a legal liability to be incurred by the company in the first place, and it is not an abuse to rely upon the fact, if it is a fact, that the liability is not the controllers, because it is the company’s. - this is what occurred in Salomon. The court can piece the corporate veil only where there is an attempt to conceal or evade legal liabilities, which under Adams v Cape Industries, ought to follow.  The lord does not expressly make reference to Adams v Cape, but uses the language. In an examination of the previous cases, the court, like in Adams v Cape, did not overrule them but stated that there ought to read through a different lens and ask whether the result could be justified on another base. For instance in Gilford Moto Company v Horne, Lord Nueberger in Prest Stated that, when the court sued the expression cloak and sham, there was suggesting a principle, agent relationship. Page 30 of 68 Akhmedova v Ackmedova 2018 All ER 213 Facts- the wife was awarded 41% of the marital assets, and there was a privet jet a helicopter and a yacht owned by a company. The wife asked the court to piece the corporate veil, contending that the company was a mere nominee of her husband. The court courted Prest, and states that nominee ship is a traditional principle which is a highly fact-specific issue. The approach in Prest, which suggest an examination of the particular facts, and then decides whether or not some other legal construct should be developed, was affirmed in Akhmedova. This affirmation was done with the use of the language from Prest Urban Development Corp v Jacitiar. This case involved adverse possession. The main issue was whether the company can acquire an interest in the parent company by adverse possession. The Court of Appeal embarrassed what it described to be an enduring robustness, of the principle of separate legal personality. Prest was a re-affirmation of this principle. The court did hold that the subsidiary could and did acquire the parent property by adverse possession. Chandler v Cape 2012 EWCA 525 This case is similar to Adams v Cape Industries. Unlike, in Adams v Cape, the court in Chandler v Cape, looks at the tort itself, that is an examination of negligence, to examine whether was a sufficiently proximate relationship between the companies so that liability can be laid on the parent for injuries suffered at the hands of a subsidiary. Facts – Mr Chandler was employed for a short period in a factory owned by Cape Building Products Limited (Cape Products) which manufactures asbestos products. As a result of his asbestos exposure, he contracted asbestosis and brought a claim against Cape Plc, the parent company of Cape Products. Cape Plc was involved in a certain aspect of the strategic direction of Cape Products, as well as its health and safety measures. On this basis Mr Page 31 of 68 Chandler claimed that Cape plc was liable on the basis of a direct duty of care to the employees of its subsidies. Held- the court held that the simple fact that Caple Plc was the parent company of Cape products, did not mean that it was liable to Cape Products employees. The court also stated that this was not a case where the corporate veil could be pieced. However, the court found that Cape PLC had assumed a duty of care to Cape Products employees since the damages was foreseeable there was sufficient proximity of relationship between Cape Plc and Cape Products and it was otherwise fair just and reasonable to impose the duty of care on Caple PLC. Lord Justice Arden sets out circumstances in which a duty of acre might be held to apply 1. the businesses of the parent and subsidiary are in a relevant respect the same 2. the parent has, or ought to have, superior knowledge of some relevant aspects of health and safety in the particular industry. 3. the subsidiary’s system of work is unsafe as the parent company knew, or ought to have known; and 4. the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees’ protection NOTE For the purposes of (4), it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely. The court may find that element (4) is established where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues OVER ALL COMMENTARY Page 32 of 68 If the approach in Prest and Adams v Cape, is to restrict the exceptional cases where the court will piece the corporate veil of incorporation, but there is a recognition that traditional legal principles also apply. Thus as the court did in Prest, the veil does not have to be pieced, for an outcome to be achieved.  Traditional legal principles include. o Trust o Nomination o Agency Prest is saying, whether or not the traditional principle will operate to skirt the separate cooperate personality principle, is decided on the facts of the case. Topic 3 – Director’s duties Summary There are three types of directors 1. De facto directors – individuals not duly incorporated under the company act 2. De Jure directors- individuals who are duly incorporated under the company act as a director 3. Shadow directors- Page 33 of 68 All these directors are covered under the company act, due to its wide definition of a director. To show that an individual is a de facto director, it must be shown that i. He assumes such a position ii there was a holding out by the company, of this individual being a director if a claim is made that an individual is de jure director the claimant must specifically plead and prove that the individual undertook functions in relation to the company, which can properly be discharged only by a director. Who and what is a director 3.1 Introduction The company is not a natural person, it is an artificial person that lives only in the internment of the law (Salmon v Salmon). The company itself cannot act as its own person at all times. There is a need, at some point in time for human functions to be performed (e.g making of decisions, employment of employees) In Ferguson v Willison and Ernest v Nicholas, the house of lords and the court or appeal in England, stressed that acts of human beings are those that ultimately that must be counted, for the purpose of liability, at the level of cooperation. –cooperation as an artificial binging will not be criminally liable unless the state of mind or certain living persons, can be said to be attributable to the company. At the time the statute was based in the region, the common law recognized that the expression director could cover the person who was not specifically advertised by the company to be its law full directors. The question of who a director at common law is answered based on the fact. Thus, if a person is not duly appointed as a director but assumes the responsibilities of the director, and the company holds him out to be, this is sufficient to make the individual a director. The onus is on he who says that the company's registry is not conclusive evidence. Commentary Page 34 of 68 Although cooperation is said to be an individual being in law, separate and distinct from the individuals who might own it or might manage it, this does not obviate the necessity for real individuals to play a role in the direction of the company. 3.2 Definition of Director One of the key constituencies of a real person that must be considered, in the context of every cooperation is the director It would be expected that the companies act, will give some direction as to who a director is. However, this is not the case. The expression ‘director’ as such is not defined in any of the Companies Acts in the Commonwealth Caribbean. The Trinidad and Tobago Companies Act (TTCA) defines what is a director in section 4, by using the word director to define a director. – a “director”, in relation to a body corporate, means a person occupying therein the position of a director by whatever title he is called. Who is a director? The statutory definition of a director does not clearly disclose whether, to be a director, a person must be formally and validly appointed to the board of directors, or, in other words, be a de jure director, or whether a person who has not been formally and validity appointed, but who assumes the position and function of a de jure director, is also a director. Thus, to find out what a director covers one must look to the common law. It must be noted that at the time the statute was promulgated, the director was already a person known in law. 3.3 De facto, De jure directors and Shadow Directors. At common law, the person appointed duly as a director is known as a de jure director. De Jure directors are those who are validly appointed and notified in the company’s registry. At common law, individual who is not validly appointed, but serves as directors, are called de facto directors. These individuals also fall under the statute, as the statute in relation to directors, makes reference to a person occupying the position of a directors. – thus the Page 35 of 68 section are not limited to de jure directors and includes persons performing the role of a director, even if there are not called a director. A. De facto Directors Rule- A person who assumes to act as a director, who is held out as a director by the company but is never actually or validity appointed to the office or the director, will be treated in law as a director. NOTE A holding out is a representation, by the company that a certain individual is a director. That is the company has to act in a manner or make expressions, that are consistent with the person being a director. Re Hydro-dam 1994 There must be an assumption of responsibility and the holding out by the company. Lord Millet at page 185, The difference between de facto and de jure directors is that the former is lawfully appointed. If the person is lawfully appointed as a director, then the law treats him as a de jure director. An individual can still be a director, if there are not lawfully appointed, that is a de facto director. A person who assumes to act as a director, who is held out as a director by the company but is never actually or validity appointed to the office or the director, will be treated in law as a director. Onus of proof If a claimant is seeking to bring someone within the definition of a director in the absence of a de jure appointment, the onus is on the claimant to specifically plead and prove that the individual undertook functions in relation to the company, which can properly be discharged only by a director. Page 36 of 68 Energetics Plc v Hazarika The court held that a CEO ( a Chief Executive officer) can be considered to be a de facto director if there was both an assumption of responsibility by the individual and the holding out by the company of the individual as a director. On the facts of the case, the court held that this was not established Holland v IRC In this case, the standard or the burden of proof set out in Re Hydro Dam was examined. The court held that IRC had failed to establish that the individual had performed functions that could have been properly performed by a director. Commentary If an individual brings an action for breach of fiduciary duties, or in negligence, against a COE or an officer of the company, then the question of whether the individual is a de facto or de jure director is mute is these individuals are covered under the understanding of an officer of the company. – this applies to any other officer of the company. B. Shadow Directors This individual is not specifically defined in the statute either, except for Jamacia, in section 2 of their company act, which defines a shadow director as a person in accordance with whose directors or instructions, the directors of the company are accustomed to act. The Jamaican act is merely putting into statute a concept that is recognized at common law. No other country in the region has gone as far as Jamaica to define a show director, however, the statutory provision of the region is wide enough to encompass, not only de Jure and de facto directors, but also, what the common law has coined as shadow directors. The Rationale for holding shadow directors responsible Page 37 of 68 At common law, it was felt that as a matter of blame-worthiness, a person who effectively controls the activities of a company, should be subject to the same liabilities and disabilities as a person who were de jure directors. The understanding is, that if liability is fixed on someone because he is a director, as he occupies a position of trust and confidence, in relation to the governance of a company, such that the law should fix him with liabilities for abusing this trust and confidence that would other wise be imposed on him, then it should also fix precisely that type of liability on person who hid in the shadows, but who control effectively all of he activities of the company, as such a person is no less culturable, for abusing the trust and confidence, as opposed to people who are duly appointed as a de jure director. Secretary of State for Trade and Industry v Devrell 2001 Rule - persons with real influence in the cooperate affairs of the company should be made to answer, for the consequences which flow from the exercise of that real influence. In determining this the court will consider any words or conduct of the alleged shadow director, which casted them in the role of director, notwithstanding the fact that they leaked in the shadows. Facts- In this case, Devrell and Hopkins were appointed on a consultancy basis. There were afforded wide powers, but Devrell influence was particularly noteworthy. The directors followed his every instruction, he was made a signatory to the company bank account, and in many areas of the company basis, his authority was equivalent to that of the directors. The company went into liquidation and owed a substantial number of money to creditors. The ordinary directors were caught by the director's duties disqualification statute, but proceedings were brought against Deverll and Hopkins, on the basis that even though there were not de jure directors or de facto directors. Held- The court held that the consultants were shadow directors, and thus liable, despite the fact that they were describes as consultants. They stated that the expression shadow directors should be construed in the normal way, to give effect, to what the common law considered to be the mischief of placing liabilities on persons who were either de jure or de facto directors. Page 38 of 68 The mischief the court identified in the common law cases, was persons with real influence in the cooperate affairs of the company should be made to answer, for the consequences which flow from the exercise of that real influence. The court will look for words or conduct on the part of the alleged shadow director, which cast them in the role of directors, notwithstanding the fact that they leaked in the shadows. NOTE- Difference between a shadow director and de facto directors. A shadow director, unlike that of a de factor director, does not assume the position of a director and is held out by the company as a director, which is what constitutes a de facto director. A shadow director, hides in the shadows, effectively controlling the actual directors of the company. De facto directors, make it known that they are directors, while shadow directors, hide, and effective push and pull the levers of control of the company. Re Hydro-dam 1994 Per Lord Millet A de facto director is a person who assumes the position of director, and is held out as a director of the company and claims and purport to be a director although never actually or validly appointed as such. A shadow director does not purport to claim to be a director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others, who he claims to be directors of the company, to the exclusion of himself. The law is flexible enough to find liability in both categories of cases. Summary of who is a director. The expression “a director”, covers a multitude of potential people. A director is not only a person notified in the company registry as a director, the expression includes de facto directors (persons who function as a director as the company holds them out to be directors and they themselves act as a director) and de Jure directors The expression also included shadows directors, but in fact carry out the function of a director. Page 39 of 68 The court held that the high standard that was required, that is the onus is on the person who alleged the individual to be a director, notwithstanding the absence of a legal appointment, on the facts, such was not satisfied, as it was doubt full as to whether the company held him out to be a director 3.4 The board of directors and the duties imposed. It is important to note that the starting point is the premise that the company is managed for the benefit of the shareholders. The shareholders do not manage, but they own. Section 60 – The Management Mandate Subject to the articles and any unanimous shareholder agreement, the directors of a company shall— (a) exercise the powers of the company directly or indirectly through the employees and agents of the company; and (b) direct the management of the business and affairs of the company Commentary The section proves a management mandate. It gives the directors the power to manage the company subject to the articles and any unanimous shareholder agreement, (the unanimous consent of shareholders) This means that if all the shareholders agree (unanimous agreement) on something, the director must follow How the company is to be managed is not indicated in section 60, but in section 99, the Act stipulates what standards are expected in the exercise of their management function Statutory fiduciary and non-fiduciary duty Page 40 of 68 Section 99 – Director's Duties (1) Every director and officer of a company shall in exercising his powers and discharging his duties— (a) act honestly and in good faith with a view to the best interests of the company; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. (2) In determining what are the best interests of a company, a director shall have regard for the interests of the company’s employees in general as well as to the interests of its shareholders (3) The duty imposed by subsection (2) on the directors of a company is owed by them to the company alone; and the duty is enforceable in the same way as any other fiduciary duty owed to a company by its directors. (4) No information about the business or affairs of a company shall be disclosed by a director or officer of the company except— (a) for the purposes of the exercise or performance of his functions as a director or officer; (b) for the purposes of any legal proceedings; (c) pursuant to the requirements of any written law; or (d) when authorised by the company. (5) Every director and officer of a company shall comply with this Act and the Regulations, and with the articles and Bye-laws of the company, and any unanimous shareholder agreement relating to the company. (6) Subject to section 137(2), no provision in a contract, the articles of a company, its Bye- laws or any resolution, relieves a director or officer of the company from the duty to act in accordance with this Act or the Regulations, or relieves him from liability for a breach of this Act or the Regulations. Page 41 of 68 Commentary on section 99. The word ‘every’ in 99(1) stipulates that the section imposes a duty on individual directors and officers of a company. It imposes a mandatory standard (‘shall’) on directors (including officers) in the exercise of their powers to act honestly (the fiduciary duty) and in (b) to exercise case diligence and skills (the negligence standard)  99(1)(a) – a statutory fiduciary duty  99(1)(b) – a statutory negligence duty. NB- if this duty is breached, the company can sue the director for breach of either of the statutory duties in (a)(b) s. 99(6), prevents the contracting out of the statutory duties under 99(1)(a)and(b) by directors. This subsection is subject to section 137(2). The statutory duties is subject to section 137(2) Unanimous shareholder agreement Section 137(2) The section provides that the statutory duties under 99(1)(a) and (b) does not exist when there is a unanimous shareholder agreement, and these duties now fall on the shareholder and the directors are relieved of these duties to that extent any unanimous shareholder agreement- a unanimous expression of the will of all the shareholders (2) A shareholder who is a party to any unanimous shareholder agreement has all the rights, powers and duties, and incurs all the liabilities of a director of the company to which the agreement relates, to the extent that the agreement restricts the powers of the directors to manage the business and affairs of the company; and the directors are thereby relieved of their duties and liabilities to the same extent. Page 42 of 68 Commentary on section 137(2) This section relieves the directors of any liabilities acting on the unanimous agreements of the shareholders. NB, section 99, 60 and 137 must be read together 3.4. A- The non-fiduciary duties of the directors under 99(1)(b) The Morden position is part objective and part subjective. Section 99(1)(b) (1) Every director and officer of a company shall in exercising his powers and discharging his duties (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. NOTE The test in the statute in part subjective and part objective. The phrase ‘a reasonably prudent person would exercise in comparable circumstances, is a statutory codification of the common law at the time of the statute enactment in 1995. The law in this area begins even before the House of Lords (Donoghue v Stephenson), which articulates a general duty of care in negligence. The act does not indicate what is the standard that is to be expected of the director, thus we look to the case law. Page 43 of 68 The test The 99(1)(b) standard builds on the case of Re City Equitable Fire insurance The subjective and objective test for 99(1)(b) Re City Equitable Fire Insurance Rule - A director need not exhibit in the performance of his duties, a greater degree of skill that might reasonably be expected from a person of his knowledge and experience – per Justice Romer. The duty of reasonable care expected of a company’s directors is generally said to be that of an ordinarily prudent person might be expected to take in the circumstances (objective) on his own behalf, with the knowledge and experience of the director concerned (subjective) For the purposes of directors duties, it must be shown that the individual acted in a way, that fell sort of what could be expected of him This case was established 7 years before Donoghue v Stephenson. Justice Romer, at first instance, held that in so far as the director’s non-fiduciary duties were concerned, three fundamental elements were inveighed – 1. The director should display an appropriate standard of competence and care 2. He should display an appropriate standard of diligence and devotion to the company business affairs 3. He should not improperly delegate any of the duties that are imposed on him NB- points 1 and 2, are echoed in the statute, although this case was decided about 6-7 years before its inception. Page 44 of 68 In respect to the first element, Justice Roma at page 427 of the Chancery Reports, a director need not exhibit in the performance of his duties, a greater degree of skill that might reasonably be expected from a person of his knowledge and experience – ‘his’ – the subjective test. Commentary Here the judge is saying that allowance should be made for who the director is. This is partly a subjective test – ‘his knowledge and experience” The Common Fools Defence Re brazilian rubber plantations A company is established to purchase land in Brazil, which was used to cultivate rubber and other produce. The company has four directors, three of which has no experience in the rubber business. A prospectus is issued, and members of the public are invited to purchase shares in the company. The prospectus contained untrue statements. The company later goes into liquidation, and the creditors sought damages from the past directors, arguing that in signing off on the prospectus there did not act with skill, diligence and care. Justice Nevil at first instance held that a director is not bound to bring any special qualification to his office. He may undertake the management of a rubber company, in complete ignorance of everything, connected with rubber, without incurring liability for any of the mistakes that may flow from such ignorance. Commentary. This defence is known as the common fool’s defence. – this is a defence that allows for the removal of liability if an individual was knowledgeable about the matters that his company was engaged in. the common law was ok with this. COMMENTARY The principle in the two aforementioned cares principle is subjective, as the cases have not as yet developed an objective standard for negligence, with such not being so until Page 45 of 68 Donoghue v Stephenson. Thus the Morden law does not allow for such a defence, as it frames culpability in an objective standard. Michael Ashe Company Lawyer 2012, 33-34 Here ash postulates that, in the present time, Donoghue v Stephenson has an entrenched and objective standard of liability, which respect to negligence. The test to govern what is meant by ‘care, skill, and diligence’ that test must take account of the general skill and experience, that may be expected of a person carrying out the function performed by the director. Lecture Dated 9th Nov Summary from the previous class There are two types of director's duties, which are now set out in the company act, making them statutory duties. 1. A fiduciary statutory duty - section 99(a) 2. Non- fiduciary statutory duty – this is analogous to the duty of care that exist in negligence – section 99(b) The courts in company law began their work on this aspect before the seminal case of Donoghue v Stephenson. In Re City Equitable fire insurance, justice Romer, as he then was, fashioned the director's duty by reference to a subjective standard- ie, one must look to the individual director to determine if he was care less. It was only after Donoghue v Stephen was decided, that the courts then appreciated that an objective standard could be applied to culpability in negligence. The recent law tells us to the question of whether a director has been negligent, will now be addressed by both subjective and objective standards- ie looking at the director (subjective) as well as what could be expected of him in relation to others (objective) Page 46 of 68 The test is in part subjective and in part objective. Care skill and diligence is the case skill and diligence exercised by a reasonable person (objective) with the general skill and experiences that the director has (subjective) – found in Michel Ash Articles. The Morden law does not consider the ‘I am foolish’ defence The delegation of the Duty of care and reasonable skill Re Barings PLC 1999 BCLC 433. NB- this case was decided before the formation of the statute. The director’s duty to exercise care, diligence and skill is breached, if their delegate their functions, without proper management and supervision. Delegation to someone of competence and integrity is not a defence. Rule- 1. Directors have both collectively and individually responsibility to acquire and maintain sufficient knowledge of the company’s business to enable them to properly discharge their duties as directors. 2. directors are entitled to delegate their function, and may trust the delegate to be competent and a person of integrity, but to a reasonable extent. The exercise of that power of delegation does not absorb the director from the duty to supervise the delegated function. Facts- Barings was a Merchant Bank. The bank had appointed a general manager for their operations in Singapore, a one Nick Leeson. Without any authorization, he engages in a series of risky trades, which resulted in substantial losses. He used funds from the bank to facilitate these trades. Disqualification proceedings were brought against three of its former directors who were based in London. It was alleged they had failed to adequately supervise the CEO and been guilty of serious failures of management in relation to a rogue trader; for instance, they had given the rogue trader huge funding without proper inquiry and had not instituted appropriate internal management controls. It was alleged that the directors Page 47 of 68 breached their duty of care to exercise skill in relation to Barings, to such a degree that their disqualification from future directorship was warranted. It was argued by the directors, that there had delighted such functions to Leeson, as they trust he was competent and of integrity. Held- The disqualification proceedings passed on the facts were warranted. The court agreed that the directors can delegate their function and may trust the delegate to be competent and a person of integrity, to a reasonable extent. Justice Jonathan Parker, looked at the expression duty of care and skill and held 1. Directors have both collectively and individually responsibility to acquire and maintain sufficient knowledge of company’s business to enable them to properly discharge their duties as directors. NOTE  This duty is imposed in the individual director and the board of directors  This is a continuing duty as well 2. The director is entitled to delegate particular functions to those below them, in the management chain, and to trust their competence and integrity to a reasonable extent. The exercise of this power of delegation does not absorb the director from the duty to supervise the discharge of the delegated function. NOTE The general principles, set out are positive in nature and permissive to an extent. It is positive in the scene the court says that the directors have a continuing duty to keep themselves informed and act properly in their discharge as directors. However, the court admits that directors may delegate their function, and may trust the delegate to be competent and a person of integrity, but to a reasonable extent. The exercise of that Page 48 of 68 power of delegation does not absorb the director from the duty to supervise the delegated function. Ie this is what caught the directors in Re Bearings Re Park House Properties Ltd 1998 BCC 847 This case concerned an improper delegation of power Facts- Ivan Henry Carter and his wife, son and daughter, were directors in a company that took over control of a complex of industrial buildings (Park House) on the basis of a draft agreement drawn up by Carter’s account. The agreement provided for Carter to remain solely responsible for all the management and financial decisions in relation to Park House, one of which involved an extension of the property. Carter was also responsible for communication with the account for the purpose s of tax, and accounting advice. Breaches of the Duty of Skill, Care and Competence standard Application of the subjective and objective test Page 49 of 68 Re D’Jan of London Ltd BCLC 561 Facts- D’Jan was a 99% shareholder of the company, and a director. He signs, without reading , a fire insurance form, that contained a number of inaccuracies. A fire caused damage to the company’s presumes, and the company makes a claim on the insurance policy. The claim failed as the director failed to cover the company for the type of loss that had occurred. The director is sued. Held- The held that the director had breached his duty of care, skill and competence owed to the company. The court reasoned that  If the document is huge and for legal purpose, it is not a breach of a duty of care for D’Jan to sign it on the advice of a solicitor.  However, in the present case, the document was small and simple, thus by failing to read it prior to signing it, the D’jon was not reasonably diligent. NOTE – Test The court noted the role of the director in relation to the UK Insolvency Act. That is – The conduct of: a reasonably diligent person having both- (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has.’ COMMENTARY This case is decided in 1994, ie almost 100 years after Re Equitable Fire Insurance is decided. Re Continental Assurance Co of London 1997 1 bclc 48 This case applied the subjective element to find liability Page 50 of 68 Facts- An application was made to disqualify the director of a company, based on the allegation of an alleged wrong, while the director was in office. That is the company made loans, which were financial assistance for the purchase of its own shares. This was a breach of the UK company act. The director claimed, in his defence, that he failed to appreciate that the money was actually being disbursed as a loan to purchase shares in the company. Held- the court held that any competent person in his position would appreciate what the money was being used for, but even more so, because he was an accomplished cooperate financier, he would have appreciated what the accounts meant, and because the test was in part subjective, his higher than usual skill set was sufficient to ensure that he was found liable. Thus on the subjective standard, he was caught. COMMENTARY Here, unlike the early cases, the court is applying the Morden approach to the non-fiduciary duty of skill, care and competence, which is a part subjective and objective test University of Trinidad and Tobago v Kennet Julien Facts- The action was brought by the exiting board, against the defendant of the former board of directors, alleging breaches of their fiduciary duties and their duties to exercise care diligence and skill, in the management of UTT affairs. These preaches centred on the allegation that a particular sub-lease of land acquired by the UTT, had a defective title, and there was negligence in the execution and termination of the lease, after the discovery of the title defect. Per Justice Cokerham In general terms, actions of a breach of a breach of a fiduciary and non-fiduciary duty, should not be pursued likely. There should be a policy of judicial restraint. The teach hold of judicial intervention, would be extremely high. Commentary Page 51 of 68 The court is saying that it will not get involved in the running of a company, the court should be engaged when it is certain that there is a breach of the 99(a) and (b) duties Peoples Department Stores Ltd v Wise (1992) The Supreme Court of Canada held that the fiduciary duty imposed by the Canadian Business Corporations Act does not extend beyond the corporation directly to its creditors. The Court emphasised, however, that the various shifts in interests that naturally occur as a corporation’s fortunes rise and fall do not affect the content of the statutory fiduciary duty. At all times, directors and officers owe their fiduciary obligations to the corporation and these obligations do not change depending on whether the corporation is insolvent or in the vicinity of insolvency. The directors may, however, given the circumstances of a case, balance the interests of multiple stakeholders, including creditors, and utilise their business judgment to determine what the best interests of the company are. COMMENTARY Profession Burgess in his text in relation to People Department Stores, suggests that the court should be slow, to second guess the decision of directors taken ‘bona fide in the heat of battle. The term ‘bona fide’ has no bearing on carefulness. The term means in good faith, and speaks to honesty. The case is suggesting that unless it can be shown that there is a breach of fiduciary duty, the courts will grant no relief for a simple breach of duty of care, in the vast majority of cases. Page 52 of 68 The Fiduciary duty in 99(1)(a) The Duty of Honesty This duty is set out in Section 99(1)(a) Every director and officer of a company in exercising his powers and discharging his duties shall in exercise of his power and discharging his duties (a) act honestly and in good faith with a view to the best interests of the company; NOTE ON THE SECTION This duty in section 99(1)(a) is owed by the individual director or officer of the company, to the company. The duty is taken to refer to the director’s duty to act in obedience to his fiduciary duty. This is what the legislature intended in acting duties of honesty and good faith. These duties are from the core of fiduciary duties. Like the 99(1)(b) standard, the 99(1)(a) standard builds on the common law. The 99(1)(b) standard builds on the case of Re Equitable Fire Insurance, 99(1)(a) build on the decisions of Aberdeen Rly Co v. Blaikie Bros and Re Smith & Fawcett Ltd Ch 304, The common law set a high standard on directors to act as fiduciaries in respect to the companies that their served. Duties Owed to the Company Duties Owed to the Company – section 99(2) Section 99(1) Every director and officer of a company shall in exercise of his powers and discharge his duties (a) act honestly and in good faith with a view to the best interest the company Page 53 of 68 Consideration with respect to section 99(1)(a)  The duty is owed by the board but by t

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