ACCA F4: Chapter 7 - Corporations and Legal Personality

1 The doctrine and veil of incorporation The company is separate legal entity (i.e. separate from its shareholders, the part owners and its directors, the managers) 1) Salomon v Salomon & Co Ltd (1897)Facts: S transferred his business to a limited company. He was the director and majority shareholder and a secured creditor. The company went into liquidation and the other creditors tried to obtain repayment from S personally.Held: S as shareholder and director had no personal liability to creditors, and he could be repaid in priority as a secured creditor. This enshrined the concepts of separate legal personality and limited liability in the law. 2) Lee v Lee’s Air Farming Ltd (1960)Facts: This case concerned an aerial crop-spraying business. Mr Lee owned the majority of the shares (all but one) and was the sole working director of the company. He was killed while piloting the aircraftHeld: Although Lee was the majority shareholder and sole working director of the company, he and the company were separate legal persons. Therefore he could also be an employee of the company for the purposes of the relevant statute with rights against it when killed in an accident in the course of his employment. 3) Macaura v Northern Life Assurance (1925)Facts: M owned a forest. He formed a company in which he beneficially owned all the shares and sold his forest to it. He, however, continued to maintain an insurance policy on the forest in his own name. The forest was destroyed by fire.
Held: He could not claim on the policy since the property damaged belonged to the company, not him, and as shareholder he had no insurable interest in the forest.

1 The doctrine and veil of incorporation - Limited liability. A company is fully liable for its own debts. If a company fails, the liability of the shareholders is limited to any amount still unpaid on their share capital (or any amount they have agreed to contribute if the company is limited by guarantee). - A company enters into contracts in its own name and can sue and be sued in its own name - A company owns its own property. - A company has perpetual succession, irrespective of the fate of shareholders - The management of a company is separated from its ownership - A company is subject to the requirements of the Companies Act 2006 (CA06) - This is known as the rule in Foss v Harbottle (1843)Facts: Two minority shareholders initiated legal proceedings against, among others, the directors of the company. They claimed that the directors had missapplied the company's assets.Held: The court dismissed the claim and held that when a company is wronged by its directors it is only the company that has standing to sue.

2 Lifting the veil of incorporation In certain circumstances the courts can look through the company to the identity of the shareholders. The usual result of lifting the veil is that the members or directors become personally liable for the company’s debts.

2 Lifting the veil of incorporation - S399 of CA06 requires accounts to be prepared by a group of related companies, therefore recognising the common link between them - Under the Insolvency Act 1986 (IA 1986), members and/or directors liable for wrongful or fraudulent trading may be personally liable for losses arising as a result. - If a public company starts to trade without first obtaining a trading certificate, the directors can be made personally liable for any loss or damage suffered by a third party: S767 CA06 - Under the Company Directors Disqualification Act 1986, if a director who is disqualified participates in the management of a company, that director will be jointly or severally liable for the company’s debts.

2 Lifting the veil of incorporation 1) The veil will be lifted only where ‘special circumstances exist indicating that it is a mere facade concealing the true facts’: Woolfson v Strathclyde Regional Council (1978) 2) Gilford Motor Co Ltd v Horne (1933)Facts :An employee had a covenant in his contract of employment which stated that he would not solicit his former employer's customers. After he left their employment he formed a company to solicit those customers and claimed it was the company approaching the customers and not him.Held: The court held that the company could be restrained from competition, as the previous employee had set it up to evade his own legal obligations. An injunction was granted against him and the company Jones v Lipman (1962)Facts: Mr. Lipman contracted to sell his land and thereafter changed his mind. In order to avoid an order of specific performance he transferred his property to a company. Held: The veil was lifted in order to prevent the seller of a house evading specific performance. An order of specific performance was granted against him and the company to transfer the property to the buyer.

2 Lifting the veil of incorporation 1) In times of war it is illegal to trade with the enemy. It may be possible to lift the veil of incorporation so as to impute to a company the same nationality as its members. 2) Daimler v Continental Tyre & Rubber Co (1916)Facts: C sued D for debts owing. C was a UK company, however all shareholders but one were German. D argued that they should not pay the debt to German individuals to prevent money going towards Germany’s war effort.Held: As C was German, D need not discharge their debt to C since effective control of the latter was in enemy hands and hence to do so would be to trade with the enemy

2 Lifting the veil of incorporation 1) - benefit the group by obtaining a higher compensation payment on the compulsory purchase of premises - benefit creditors of an insolvent company by making other companies within the group liable for its debts 2)DHN Food Distributors v London Borough of Tower Hamlets (1976)Fact: DHN carried on business from premises owned by a subsidiary. The subsidiary itself had no business activities. Both companies had the same directors. The local authority acquired the premises compulsorily but refused to pay compensation for disturbance of the business since the subsidiary, which owned the premises, did not also carry on the businessHeld: The companies were, in economic terms, mutually interdependent on each other and therefore they should be regarded as a single economic entity. Thus there was a valid claim for disturbance since ownership of the premises and business activity were in the hands of a single group. Adams v Cape Industries (1990)Facts: Cape was an English registered company. One of its subsidiaries, CPC, a company incorporated and carrying on business in the United States, had a court judgement against itHeld: It was unsuccessfully argued that the veil should be lifted between the companies so as to enable the judgement to be enforced against Cape. The Court of Appeal said there were no special circumstances indicating that CPC was a mere facade for Cape such as was the situation in Jones v Lipman

3 LLPs Ordinary (or general) partnerships lack the characteristics of a company, they do not have limited liability or separate legal personality. Government was pressurised to recognise the needs of some partnerships (especially professional partnerships such as solicitors, accountants and auditors) to limit their liability and have separate legal personality without having to form a company.

3 LLPs - Incorporation document must be delivered to registrar stating name of LLP, location and address of registered office, names and addresses of members (minimum two). - Must send a declaration of compliance that LLP satisfies requirements of the Limited Liability Partnerships Act 2000. - Registrar issues a certificate of incorporation

3 LLPs - First members sign incorporation document. Later members join by agreement with the existing members - Membership ceases on death, dissolution or in accordance with agreement with other members - Rights and duties are set out in membership agreement. If no agreement, governed by Limited Liability Partnership Regulations 2001. Each member acts as an agent of the LLP.

3 LLPs - Perform the administrative and filing duties of the LLP - Incorporation document specifies who they are. - Must be at least two designated members. If there are none, all members will be designated members.

3 LLPs - Must end with Limited Liability Partnership, llp or LLP. - Rules on choice are the same as for companies.

3 LLPs Members are treated as if they are partners carrying on business in a partnership, i.e. they pay income tax, not corporation tax.

3 LLPs - The liability of a member of an LLP to contribute to its debts is limited to his capital contribution. However, there is no requirement for a capital contribution, and any contribution made can be withdrawn at any time. - If an LLP goes into liquidation, the court can order the members to repay any drawings made in the previous two years if it can be shown that the member knew or had reasonable grounds to believe that the LLP was unable to pay its debts at the date of withdrawal, or would become unable to pay its debts because of the withdrawal: s214A Insolvency Act 1986 (IA 1986). - The fraudulent and wrongful trading provisions of IA 1986 apply to members of LLPs in the same way as they apply to directors of companies

3 LLPs - The liability of the members of an LLP is limited to the amount of capital they have agreed to contribute - The LLP must file annual accounts and an annual report with Companies House - LLP is an artificial legal entity with perpetual succession. It can hold property in its own right, enter into contracts in its own name, create floating charges, sue and be sued.