Week 1 Handout - LAW559 Company Law PDF

LAW559 Company Law – Week 1 Handout The Law of Business Organisations and Corporate Personality Introduction The law of business organisations concerns the law governing the setting up and activities of various business organisations. Three types of business organisation may be identified: sole t...

LAW559 Company Law – Week 1 Handout The Law of Business Organisations and Corporate Personality Introduction The law of business organisations concerns the law governing the setting up and activities of various business organisations. Three types of business organisation may be identified: sole trader, partnership and company: - a sole trader is a business owned and operated by an individual. - A partnership is a business owned and operated by partners under the terms of a partnership agreement. - There are different types of company and this makes a single definition unsatisfactory. However, as the most important forms of company for our purposes are public and private companies limited by shares, it may be said that a company is a commercial enterprise with a corporate personality recognised by law, owned by shareholders, and operated by management (a board of directors) in accordance with a company constitution and the requirements of Company Law. Partnership Partnership is a business relationship based on trust and confidence between persons as they pursue a commercial activity for profit together. Main statute is: Partnership Act 1890. S.1 describes the nature of a partnership as: “a relationship which subsists between persons carrying on business in common with a view to profit”. - created by express or implied agreement of Partners. No special form of agreement is required, though terms of partnership are usually recorded in a written partnership agreement. Kind of things that will be included: date of commencement, duration of partnership, partners names, capital and assets contributed, partnership property, proportion of profits partners entitled to, events terminating agreement, introduction of new partners, rights and liabilities on dissolution of partnership. - Partnership is not separate from its members. Partners own the firm, its property, its rights and liabilities. - Partners cannot transfer their stakes in the firm without the consent of all other partners. - All partners are entitled to share in the management of the firm unless the partnership agreement says otherwise. S.24 of Partnership Act 1890. - A partnership will be bound by the actions of any and each of its partners as partners are deemed to be individual agents of the partnership. S.5 Partnership Act 1890. - A partnership will be bound by the actions of any and each of its partners as partners are deemed to be individual agents of the partnership. S.5 Partnership Act 1890. - Liability for partnership debts is unlimited unless the partnership agreement says otherwise, and there is at least one general partner to account to any creditors the partnership might have. Companies A raft of legislation governs the setting up of companies, and their legal rights and responsibilities as they pursue their commercial activities: Companies (NI) Order 1986 The Business Names (NI) Order 1986 The Criminal Justice Act 1993 Part V The Companies Consolidation (Consequential Provisions) (NI) Order 1986 The Insolvency (NI) Order 1989 The Companies (NI) Order 1989 (abolishing the UV rule) The Companies (NI) Order 1990 The Companies (No. 2) (NI) Order 1990 NOW – COMPANIES ACT 2006 Many of these legislative provisions have been introduced to implement EC/EU Directives on Company Law : particularly in relation agency, and the abolition of the ultra vires rule (First Directive); minimum share capital of public companies (Second directive); form, contents and disclosure of accounts (Fourth Directive). Setting up a Company Usually done by incorporation and registration under the Companies Act 2006. - Incorporation refers to the first meeting of subscribers at which first directors are appointed and common company seal is established. Registration refers to a procedure whereby newly incorporated companies have their incorporation legally recognised under company law. What happens in reality – Registration „off the shelf‟ About 50% of registered companies are registered by firms who specialise in supplying companies „off the shelf‟ to buyers who need them to expand their commercial activities. Such „off the shelf‟ companies are ready made and already incorporated, sit on the shelf, then sold to a suitable buyer. Distinguishing a Company and a Partnership 1 Company created by incorporation and registration, whereas partnership is created by express or implied verbal or written agreement of partners. Don‟t even need to write a partnership agreement down. 2 Company has a separate legal personality, separate from its members may sue or be sued in its own right, and enjoys perpetual succession, ie doesn‟t cease on death of its members. Partnership is not separate from its membership, members bear partnership liabilities and partnership dissolves on death of a member. See Salomon V Salomon & Co Ltd AC 22- separate personality. Macaura V N.Assurance AC619- rights and liabilities belong to company, not members. 3 Company shares can be freely transferred by shareholder through procedure laid down in articles of association, but a partner cannot transfer his holding without consent of all other partners. 4 A member of company cannot bind company and does not have authority to act on companies behalf. Partners are deemed to be agents of partnership with implied authority to act on its behalf, and the actions of one partner will bind the partnership. Agency will be mentioned shortly. 5 Limited liability – members liability for company debts are limited to the amounts unpaid on their shares, or by the amount they have guaranteed, if it is a company limited by guarantee. Partners liable for partnership debts. Types of Company * Chartered Companies: incorporated not by registration procedure but by grant of royal charter, where the companies are created for non-profit making, charitable or educational purposes: eg QUB. * Statutory Companies: incorporated by legislation. Often public authorities: NIHE incorporated by Housing Executive Act (NI) 1971. * Companies incorporated by registration other than registration under the Companies Order, e.g., Building Societies Act 1986 lays down a registration procedure to be followed by building societies. * Limited and Unlimited Companies: distinction lies in measure of liability for company debts in event of liquidation. Although an unlimited company is separate from its members, members are liable to pay company money so that it can cover its debts. Only merit in having an unlimited company is in exemption from disclosing accounts and reports to registrar. * Holding and Subsidiaries – the holding or parent company will hold more than 50% equity share capital in its subsidiary. * Multinationals – simply, companies which are carrying on business in more than one country. Limited Liability Company What does it mean to say a company is a limited company? Limited liability refers to the liability of members for the companies debts in the event of liquidation. Members liability may be limited by shares (most important and common form of limited liability), or by guarantee. 1 Company Limited by Shares: How does limiting liability by shares work? A Company, by virtue of capital clause in memorandum, is given an authorised share capital, i.e., the total aggregate of nominal value of share which can be issued – each share has a nominal value fixed by memorandum, and all nominal values added together equals authorised share capital. Shares are then issued to members for an amount no less than their nominal value. However members do not have to pay immediately for all that‟s owing for the shares they have been issued. If they have not paid all that they owe on their shares, their liability for the companies debts in the event of liquidation will be limited to the amount outstanding on shares. Those shareholders who have paid up all they owe will not be liable for anything. 2 Company Limited by Guarantee: Each member gives an undertaking or guarantee to pay £X towards company‟s debts should it go under. Note that these companies have no authorised capital, so they are useless for commercial enterprise. Usually they are set up for non-commercial activities. USPCA (Inc) is an example of a company limited by guarantee. Public and Private Companies Differences between private and public companies:  Public company must have at least £50,000 authorised share capital. Private company can have more or less than this amount.  Public Company can obtain capital from share issues advertised to general public. Private Companies may only raise capital from founders and those subsequently introduced privately. Private companies which acquire more than £50,000 share capital will sometimes choose to re- register as a public company because of the advantage of being able to raise capital through share issues to the general public.  Public company is more rigorously policed by Companies Orders must have PLC after name identifying them as a stricter time limited for returning accounts. Accounts must be more detailed. Can‟t start trading as quickly as a private company can (must wait for receipt of certificate of incorporation from the registrar). The principal advantage of a Public Company is that it can raise capital through advertisement to general public. A Private Company can only raise capital from founders and those introduced individually without advertisement. However, the vast bulk of companies in the commercial world are private companies limited by shares. Legal Personality of a Company The principle of corporate legal personality is a cornerstone of Company Law. It determines that a company enjoys a separate legal identity, and is recognised as independent person in law. 1 Salomon v Salomon & Co Ltd AC 22 : At issue in this case was whether a former sole trader who acquired all but one of the shares when he incorporated his firm as a company, was a separate person in law from his company for the purposes of deciding on the validly of a debenture issued by the company. Lord Halsbury said that it is a fundamental principle of Company Law that once a company is incorporated, it is a distinct personality in law – a veil of incorporation is drawn across by the law, to separate the company from its membership. Consequences of legal personality principle – all rights and liabilities of Company belong to company. See: Macaura v N Assurance Ltd AC 619. Demonstrated that liabilities are born by company not individual members. Modern day example of the Salomon principle and the Macaura problem can be seen in Barings Plc v Coopers & Lybrand (No.4) 2 BCLC 364 See: Lee v Lee‟s Air Farming AC 12 2 Foss v Harbottle (1843) 67 ER 189. Established that the company is proper plaintiff in any action in relation to company property or interests.  There are a number of notable exceptions to this rule however, which aim to protect minority shareholders from improper use of majority voting power. I refer you to the rules on Minority Protection. Lifting the veil of Incorporation There are a number of situations where the courts will go behind the veil of incorporation to make sure it is not being used to avoid legal responsibilities and obligations. 1. Statutory Intervention Statutory examples do not seek to extinguish the veil so as to deny the existence of the corporate entity - instead they are aimed at penalising the human constituents of a company for some form of malpractice. Majority of provisions targeted at company directors rather than the membership of the company - seek to impose some form of additional liability on directors e.g. to contribute to debts of company - corporate veil is dislodged in the sense that, as a separate legal entity, a company would normally have the absolute responsibility for its own debts and liabilities. Company legislation - very specific situations where the veil may be lifted - practical approach. Recognises that the principle is not sacrosanct - pragmatic approach. Examples: Members below 2 for more than 6 months - if company carried on business for more than 6 months after membership falls to less than 2, the surviving member may be personally liable for debt incurred during this period. Aims to protect people who lend money to companies at risk of unfairly be deprived of repayment by the limited liability principle. Use of company name - Company officer who misrepresents the company on company letter or order forms, will be personally liable for any loss arising, unless the company agrees to cover the loss. Liable unless company agrees to discharge liability - strict liability and criminal fine - strict judicial interpretation. Fraudulent and wrongful trading - potentially the most significant in terms of displacing the corporate veil. Art. 177 Insolvency (NI) Order 1989: Fraudulent Trading. Persons carrying on business fraudulently will be personally liable for loss they have caused. Fraudulent trading is deliberately obtaining money in the name of the company when you know the company can not pay its debts. Art. 178 of Insolvency (NI) Order 1989: Wrongful Trading. Wrongful trading is carrying on business when you know there is no reasonable prospect of company avoiding liquidation, and you fail to take reasonable steps to minimise risk of loss to creditors. Applies to directors and/or shadow directors. Q. Are these specific situations useful? 2. Judicial intervention: The judiciary universally accept the principle of the company as a separate legal entity divorced from the interests of its members and management the veil has been dislodged by the courts: Effects of case law exceptions more acute than the previously discussed statutory ones. WHY? Fraud Used where underlying motive for incorporation of company is to enable its membership to impugn an existing binding obligation with a third party or instigate some other from of fraud. Action: court may recognise the existence of the corporate entity but may nevertheless dislodge the veil to prevent those involved in the facade or fraudulent act from escaping a liability which would otherwise have been enforceable had the co not been incorporated. Dishonest schemes? see lower courts in Salomon - no evidence of dishonest intent but lower courts felt that the fact that the business was to be converted to that of limited liability this was evidence of fraud - very wide sense. What is wrong with this reasoning? NB importance of decision in Salomon - wishing to avail off limited liability is not of itself to be regarded as fraudulent. Gilford Motor Co Ltd v Horne Ch 935 Jones v Lipman 1 WLR 832: In this case the veil was lifted where it was being used to avoid legal obligations. L entered into a contract to sell land then reneged. When J obtained an order for Specific performance, L set up a company and transferred land to it, and claimed the order did not apply to the company. Court held company was a sham, “a mask which L had held before his face to avoid the eye of equity”. See also Adams: in respect of a holding co the CA could find no legal objection where the corporate structure of a group of companies had been used to ensure that that any future legal liability which might be attached to a group enterprise would fall on a subsidiary of the holding companyy, rather than on the holding company itself. Effect: quite legitimate for company to eliminate the risk of being held potentially liable for pursuing future business activities - activities which would carry a high risk of failure - by transferring such interests to an existing subsidiary company over which it, the holding company, maintained a significant degree of control. CA - considered manipulation of group structure as legitimate means for holding company to evade liability - difficult to substantiate this as anything other as a blatant abuse of the incorporation process - regrettable that it is afforded this legitimacy. Groups Difficult decisions about whether group of companies is to be regarded as one entity. Where there are no statutory principles the courts are guided by Smith Stone & Knight - only guidelines - court will decide on the particular facts of each case. DHN Ltd v Tower Hamlets 1 WLR 852 - case involved 3 companies - holding company DHN traded from premises owned by subsidiary, Bronze Ltd - 3rd co operated transport business for benefit of DHN - litigation arose when Tower Hamlets Council ordered that the land on which the business premises were located(registered to Bronze) be made subject to a compulsory purchase order. Re terms of order compensation was to be made payable to owner of the land i.e. Bronze and for any disturbance to the landowner's business - as Bronze did not carry on any independent the council claimed that this form of compensation should not be payable - CA disagreed. Lord Denning - practical purposes treat all companies as one and that technical rule of co law i.e. separate personality could be disregarded where the ownership and control of the two subsidiaries were completely in the hands of the holding company - subsidiaries had no independent existence. Shaw LJ agreed BUT Goff LJ rationalised his decision in favour of DHN on the basis that Bronze held the property on trust for DHN and as such DHN had an equitable interest in it, sufficient to entitle it to compensation for the disturbance of the group‟s business interests. Woolfson v Strathclyde Regional Council 38 P. & CR 521. Enunciated a general principle for lifting veil of incorporation. Apart from express statutory provisions, veil should only be lifted in cases which involve holding and subsidiary companies where it was being used as a façade to conceal true facts (see Adams case). Applied in Adams v Cape Industries - read facts of this case. Held: holding company‟s apparent control over subsidiaries corporate policy would not justify the court in finding the existence of a single economic entity. Findings: Cape did control general corporate policy of NAAC BUT not part of one entity - debatable decision? NAAC not totally dependent on Cape and managed its own day to day business - entered contracts and employed staff. Rationale for approach taken by the courts: In both Gilford and Jones the company whose separate existence was disregarded had been set up deliberately in an attempt to evade an existing obligation. This was emphasised in Adams where it was made clear that the law does not look with similar disfavour on the formation of a limited liability co in order to confine the future or contingent liabilities of an enterprise within specific limits. Adams = 'where a facade is alleged the motive of the perpetrator may be highly material'. Q. Are the justifications based on the interests of justice or are they specific accepted instances in which the corporate veil has been disturbed based upon rigid and self-contained rules? See Creasey v Beachwood Motors Ltd (1992) BCC 639 - first instance judgement of Richard Southwell QC appears to reassert the belief that the underlying justification for lifting the veil may, when necessary, be couched in terms of equitable considerations and as such the decision in Cape should not be viewed a shaving been written in stone. BUT see Ord v Belhaven Pubs Ltd 2 BCLC 447 Conclusions: Veil rarely dislodged unless enemy corporations or facade cases. Other cases where veil has more readily been cast off largely dependent on the subjective analysis of considerations geared to determine a company‟s independence - flexible approach. Would it be possible or even desirable to try to attempt to formulate a set of rules which the courts could apply when faced with situations where the veil might be lifted? Why must the company be given as much independence as possible? What must the law recognise?