company law lecture 1 & 2 2009

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Company Law 2009

Eamonn McNamara

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Outline of the Course

• 10 x 2 hour lectures plus revision lecture

• 9 seminars

• Two seminar groups each Friday at 3pm (commencing Week 2)

• One 1,500 word essay to be handed in during Reading Week– Ungraded but comments will be provided

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Company Law resources

• See resources handout

• Guidance on how to use the resources

• Recommended student textbooks are Dignam & Lowry, and Gower & Davies

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The Companies Act 2006

• Consolidated legislation which replaces CA 85• The most important legislation in company law• Implemented in stages from 2007 to October

2009• BERR website has implementation timetable

– http://www.berr.gov.uk/files/file48793.pdf

• E.g. Parts 1-8 CA 06 in force 1st Oct. 2009

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Lecture 1

Business Models

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Introduction

• Aims– To introduce the three main types of business

models: sole trader, partnership & limited liability company

– To explore the advantages and disadvantages of each model

– To discuss relevant statute & case law, as well as practical issues

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Sole trader

• Is a natural person• Can employ others to work for him• Can build up goodwill• No public disclosure requirements• Whole of profit and debt of business is

personal to sole trader• Tax & other liability is personal• No limited liability if business fails

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Partnerships

• The types of partnership– General partnership: Partnership Act 1890 as

default legislation– Limited Partnership Act 1907 partnerships:

one partner must have unlimited liability– LLPs: the hybrid vehicle?

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General partnerships

• Some observations…

• The Partnership Act 1890

• The Partnership Agreement

• Joint & several liability of the partners for the partnership debts– Each partner severally (separately) liable for

the debts of the partnership as a whole– No limited liability shield

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L.P. Act 1907 partnership

• Requirements

• Advantages

• The problem

• Very useful as an investment vehicle for passive investors such as venture capitalists

• The general partner can itself be a limited liability company

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LLPs

• Limited liability partnerships

• Limited Liability Partnership Act 2000 and the 2001 Regulations

• Based on US model

• Characteristics

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Corporations

• Huge multinational companies with dozens of subsidiary companies in various jurisdictions e.g. FTSE 100

• FTSE 500 companies• Small to medium size private companies• Family businesses which have incorporated• Sole member company businesses• Charitable or educational organisations e.g.

Universities set up by Royal Charter

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Virgin: a case study

• 1970 Richard Branson starts selling records by mail order from his garage (sole trader)

• 1973 Launched Virgin label and company. Signed Mike Oldfield & Tubular Bells album

• Early 1980s Virgin Group £50m turnover

• 1984 Formed Virgin Atlantic

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Virgin: a case study

• 1986 Virgin Group floated on London Stock Exchange. 35% of shares listed. Turnover now £250m

• 1991 Joint venture with W H Smith to develop Virgin Megastores

• 1992 Sold Virgin Music Group to EMI for $1 billion!

• 1997 Virgin wins InterCity West Coast rail franchise. Ginger Productions buys Virgin Radio for £85 million

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Virgin: a case study

• 1999 Singapore Airlines buys 49% stake in Virgin Atlantic for £600 million

• 2000 Virgin Mobile partnership with One2One. Virgin soon has over 1 million customers

• 2006 Virgin Mobile UK sold for £1.68 billion to NTL. Virgin Mobile US has almost 5 million customers

• 2007 Expands Virgin Media with Setanta Sports package

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Forming a company

• The formalities• Forms 10 & 12 plus £20 fee (or £50 same day

incorporation)• The subscriber(s)• Memorandum & Articles of Association

– http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml

• Companies House• Certificate of incorporation• Subsequent filing obligations

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Formalities

• The issuance of the certificate overrides any irregularities which may have occurred during the formation of the company

• Therefore the certificate of incorporation is conclusive evidence of the proper formation of a company– Cotman v Brougham [1918] AC 514 (H.L.)

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Companies: legal personality

• All companies have a separate legal personality (“artificial” person)

• What are the consequences?– The company is a separate entity from its

members, i.e. its shareholders who are the owners of the company

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Companies: legal personality

• Other consequences of legal personality?– A company has limited liability– Company can enter into contracts itself– It can incur and enforce debts– It survives indefinitely though members may change– Constructive knowledge– Expense of annual audit unless within small

companies’ exemption– Public disclosure regime

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Types of registered company

• Public vs. private

• Limited liability vs. unlimited liability

• Limited by shares or by guarantee

• Companies Act 2006, ss.3-7

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Public & private limited companies

Public companies Private companies

Defined in s.1(3) CA 85 Not defined by statute

Limited by shares Limited by shares/ guarantee or unlimited

Min. 2 shareholders under CA 85 (one under CA 2006 -1/10/2009)

Can have sole member

£50,000 min. share cap. No minimum share cap.

Offer shares to public s.81 CA 85-crim. offence

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Limited liability companies

• The vast majority of companies have limited liability

• General rule is shareholders only liable to extent of their capital investment

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Lecture 1

Business Models

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Break

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Lecture 2

Corporate Personality

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Corporate Personality

• Aims:– To understand the role of promoters & their fiduciary

duties– To explain the dangers of pre-incorporation contracts

for promoters– To understand the scope of section 36C CA 85 – To examine the doctrine of corporate personality &

limited liability; and– To explain when the “corporate veil” may be lifted

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Pre-incorporation contracts

• Who is a promoter?

• “One who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose” per Cockburn CJ, Twycross v Grant (1877)

• Question of fact not law

• Not agent of company he promotes

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Promoters & Corporate personality

• Only when certificate of incorporation issued does the company acquire legal personality– Established in Salomon v Salomon & Co. Ltd

[1897] AC 22 (HL)

• Pre-incorporation contracts naming the company as a party cannot therefore bind the company

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Promoters

• Fiduciary duties

• Essence of duty is good faith, fair dealing, and to give full disclosure

• Key duty: promoter must not make a secret profit

• Remedies for company?

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Secret Profit of Promoters

• Erlanger v New Sombrero Phosphate Co. – Syndicate bought mine for £55,000– Syndicate then formed company– Using a nominee, syndicate sold mine to the

company for £100,000– Did not disclose interest in contract – Shareholders removed original directors– Company won action to have sale rescinded

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Secret Profits of Promoters

• Re Cape Breton (1885)– Syndicate bought coal mining land for £5K– Company promoted 2 years later– Land sold to company for £44K without a

member of syndicate, F, disclosing interest– Company affirmed contract– Company subsequently in liquidation– Liquidator sued F for breach of duty– Account for secret profit?

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Secret profits of Promoters

• But a claim for damages may be made instead…

• Re Leeds & Hanley Theatres Ltd

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Pre-incorporation Contracts

• A company can only act through its agents even though it has separate legal personality

• Agency an issue where a promoter enters into a contract on behalf of a company before it is incorporated

• The First Company Law Directive article 9

• Implemented by s.36C CA 85

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Section 36C CA 85

• Phonogram v Lane [1982] CA– L a music promoter– L signed a contract “for and on behalf of

Fragile Management Ltd” with P to manage a band

– P agreed to give £12K advance – FM Ltd never incorporated– P sued L to recover advance fee

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S.36C Contracts

• Braymist Ltd v Wise [2002] CA – CA held a promoter can enforce a pre-

incorporation contract under s.36C

• Limitations of s36C– “Shelf companies”

• Oshkhosh B’Gosh Inc v Dan Marbel Inc Ltd

– Agent must purport to act on behalf of company

• Cotronic v Dezonie

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Corporate Personality-the Salomon Principle

• Salomon v A Salomon & Co. Ltd [1897] HL– Facts– CA decision reversed by HL

• Lord Macnaghton: – “The company is at law a different person

from the subscribers…”– “Nor are the subscribers liable, in any shape

or form…”

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Salomon principle affirmed

• Macaura v Northern Assurance (1925) HL• Facts• HL decision

– Lord Wrenbury: “[T]he incorporator even if he holds all the shares is not the corporation…”

• Otto Khan-Freund (1944) 7 MLR 54: “Sometimes…”corporate entity” works like a boomerang and hits the man trying to use it.”

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Salomon principle affirmed

• Lee v Lee’s Air Farming Ltd (1961) PC• Facts• New Zealand case: appeal to Privy

Council• Lord Morris:

– Logical consequence of Salomon is that a contract can exist between the company and its major shareholder who also worked as an employee

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Salomon principle affirmed

• Secretary of State for Trade v Bottrill [2000] 2 BCLC 448 (CA)– Sole shareholder employed by his own

company– Did he have employment rights under the

Employment Rights Act 1996?

• Clark v Clark (2008) EAT 0225/97– Must not be a sham arrangement– Reduce contract to writing

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Lifting the corporate veil: 1893 to 1990

• National Security– Daimler v Continental Tyres [1916]

• Façade, fraud, or evading liability– Gilford Motor Co. Ltd v Horne [1933] CA– Jones v Lipman [1962]– Trustor AB v Smallbone [2001]

• The interests of justice?– Re a Company (1985) BCLC 37 (CA)– Creasy v Beachwood Motors Ltd [1993] (overruled by CA in Ord v Bellhaven Pubs Ltd [1998])

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Lifting the corporate veil: 1893 to 1990

• Agency– FG Films Ltd– Smith Stone & Knight v B’ham Corporation

(1939)• (case disapproved in Woolfson (1978) HL)

– Adams v Cape Industries [1990] CA

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Lifting the corporate veil: 1893 to 1990

• Group of companies: single economic unit– Re Southard & Co. Ltd [1979] CA– Lord Templeman LJ:– the general principle

• “The parent company and other subsidiary companies may prosper…without any liability for the debts of the insolvent subsidiary” [in the group]

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Single economic unit exception

• DHN v Tower Hamlets [1976] CA– The “high water mark”– CA ignored separate legal entity of subsidiary

(even though business owned & run by subsid) to allow parent company to claim compensation under planning law

• Woolfson v Strathclyde [1978] HL– Did not follow DHN on similar facts

• Adams v Cape Industries [1990] CA

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Lifting the veil: the current position

• Adams v Cape Industries plc [1990] CA– Leading case– CA reviewed cases in great detail– Effect of CA decision is, in the absence of

fraud, to restrict significantly the scope of exceptions

– Affirmed by CA in Ord v Bellhaven Pubs Ltd [1998]

– Connelly v RTZ Corp plc [1998] HL– Lubbe v Cape industries plc [2001] HL

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Lifting the veil: the current position

• Following Adams, the courts will lift the veil:– 1. When giving effect to statute or contract– 2. Where the company is a façade (e.g. Trustor AB v

Smallbone No.2 (2001))– 3. If agency present

• Express agency agreement e.g. between companies in same group? Very unlikely in practice

• Or can agency be implied from conduct cf. Millam v The Print Factory Ltd [2008] CA? CA said veil not lifted in Millam

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Statutory exceptions to Salomon

S.399 CA 2006 Consolidated accounts for group companies

S.767(3) CA 2006 PLC trading without a trading certificate (see s.761)-directors liable

S.15 Company Directors Disqualification Act 1986

Disqualified director liable if involved in company management

Ss. 213/214 Insolvency Act 1986

Fraudulent or wrongful trading-directors liable

S.24 CA 1985 (until s.7 CA 2006 in force Oct. 2009)

If PLC has only one member for more than 6 months, member personally liable.

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Lecture 2

Corporate Personality

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