Company LawLong NotesClass Revised

A. Company in Context

Legal forms of business organizations:company- sole proprietor partnership (1. ordinary partnership 2. limitedpartnership) Lts Partnerships Act 2008 trust

B. Company Law

1. Sources of Company Law

1.1 English RootsNZ Companies Acts 1908, 1933 and 1955 mirror English Acts of 1908, 1929 and 1948.Thus, English Company law cases = very persuasive source oflaw in applying NZ legislationAUS persuasive as they adopted the English model of company legislation

2. THE NATURE OF THE COMPANY

2.1 Corporate Personality Common law (CoLNZ Ch 2)

A Company is a separate legal entity in its own right,separate from any other legal person s15 + 16 Co's Actcompany is separate from shareholders, Directors, creditorsCompany is separate from underlying shareholders (Salomon v Salomon)

has full rights, powers and privileges

A company can limit its rights per ss 15, 16.e.g. B&J Ice cream 10% income reinvested into community

Powers of a company cannot be enlarged beyond ss15, 16 - per s16(2)(e.g. director of a company cannot be a company themselves Co Act 1973; Co cannot marry)

A Company has capacity:to undertake things business/activities, enter contracts and transactions,

but also subject to legal rights or duties as any other legal person

Salomon v Salomon 1897 AC 22 (HL)

Family shoe making business family workers wanted share ofbusiness

director turnedsole trader businessinto alimited liability company i.e. incorporated the co and transferred the shoe business into it

Company paid for the business transfer by lending the shoebusiness money, and secured payment for that money through a charge/debiture for the company meaning the director ranked ahead of unsecured creditors as he was secured. i.e. once the company was placed into liquidation, it's assets would be sold by a liquidator and used to pay off the companies creditors the secured creditors rank first

Salomon (director) held all except 6shares, the remainder held by his family workers one share each. Shares were distributed like this as the legislation at the time required minimum number of shareholders to be a recognised company

As managing director Salomon controlled the other shareholders they were 'dummies'

Business failed assets were insufficient to pay unsecured creditors. Secured only got some money back.

Key argument that the company was acting as the agent of Salomon, so any debts that the company incurred he was to indemnify - ie. Mr Salomon was to pay unsecured creditors2 strands of argument:

1) agency that Mr S had such control, as manageing director, controlling shares, as a trustee -

2) the company was a sham company was an alias for Mr S (collapsing the distinciton between shareholders and company) or as a mere scheme allowing him to avoid paying out shareholders

HC said company acted as Mr S' agent, CA said that the company acted as Mr S' trustee

HOL disagreed with both had either been found, it wouldmean that Mr S' liability was not limited to the amount of money that he put into the company originally, thus he would effectively be held liable for the companies everyday liabilities.A Company is to limit the liability of it's shareholders

The HOL said that the 'sham' argument could not run, as it was common practice for companies to have receptionists, and workers hold shares thus many companies would be found to be shams/aliases

Lord Shershol -

Just because a shareholder is a managing director/incontrol of the company, does not automatically make the company the agent of that person

Creditors ought to know who the director/owner of the company is

2.2 Corporate Personality Companies Act 1993

Separate Corporate Personalityblurred inpractice e.g. bank want security, shareholder personally guarantees loan for the company. Bank can enforce the guarantee against the shareholder if the company goes under. The shareholder is contracting with the bank as a separate legal person they arefree to accept or decline to do so. But if that happens the shareholder will be on the hook is the Company goes under.

A shareholder and company are free to contract with each other (Lee v Lee's Air Farming)

Lee v Lee's Air Farming

L was made sole director through the companies' article of association (in it's constitution), while also being the major shareholder (all but one of the total sahres) of his farm for top dressing -

L was killed in plane crash, and Mrs L claimd compensation under the Workers Compensation Act 1992 - to successfully claim compensation she had to prove that Mr L was a worker of the company per the Act.

Issue was L a company 'worker'?CA No As director,

2.6 Lifting the Corporate Veil

Third Parties cannottouch SH's = corporate veil (protecting SH/Co members)Salomon

Can ignore/lift veil to pin the Co's liability on it's members/directors

CoLNZch 3

2.6.1 Judicially

2.6.1.1 Avoiding an existing obligation FRAUD/FACADE

CB(1)Gilford Motor CoLtd v Horne[1933] 1 Ch 935 (CA)Fraud/facade YES

Restraint of Trade clause prevented an employee from managing a new company based on the co who hademployed him's system of pricing, management etc.; and from soliciting their clients. The Court ignored thefact that his wife ran the co ie. IGNORED DIFF LEGAL PERSONS pierced veilCB(1)Jones v Lipman[1962] 1 WLR 832 YES

sells to his own company over purchaser, J breaching agreement to J. Held co 'device/sham' for L to avoid legal obligationsL's knowledge is imputed to the Company company being a separate legal person has notice of anequitable interestvia the knowledge which L had

What explanatory power have the terms that the judges used in the preceding two cases (cloak, sham, device)?"Sham" does have a precise legal meaning: the situationwhere parties enter into a transaction using a particularlegal form, but intend that the transaction take effect other than in that form. An example is where one party "sells" property to another, but both parties intend that the "sale" really take effect as a mortgage (so that the "vendor" can "repurchase" theproperty upon payment of the sale price plus interest). In either of these two cases was the company a sham in this sense?

(2)Chen v Butterfield(1996) 7 NZCLC 261,086 NO where D agrees to lease to P, then uses premises themselves, the court held P could not sue D Tipping J coporate veil shouldonly be lifted in certain contexts, nd circumstances where it's preseve would create SUBSTANTIAL INJUSTICE Important: separate legal personality is part of legitimate facet of commerce which provides certainty

CB(2)Official Assigneev 15 Insoll Avenue Ltd[2001] 2 NZLR 492 YES(noted Watts [2001] CSLB 92) bankrupt person incorporatedcompany using names of ficitious persons. issued shares to infant children. Subsequent transfers made without childrens knowledge, to other persons without following appropriate legal procedures Claim: D using Co to hide fund that should have been available to [creditor] OA Held Co treated as same person as D = lifted corporate veil as the company structure was a sham, being used to defeat creditors OA given access to land

[corporate veil is not really in existence when a company is a fake anyway it's technically a 'fake veil' thus it has no ability at law to be present as it does when the company is a legitimate, and not a sham company]

2.6.1.2 Agency

CB(2)Smith, Stone &Knight Ltd v Birmingham Corporation[1939] 4 All ER 116How can the finding of agency in this case be reconciled withSalomon?Do you think that the facts upon which the agency relationship was found are unusual in parent/subsidiary relationships?

(2)RePolly Peck International Plc[1996] 2 All ER 433CB(1)A-G v Equiticorp Industries Group Ltd[1996] 1 NZLR 528 (CA)

2.6.1.3 But the starting point is the importance of the doctrine of separate corporate personality

(2)DHN Food Distributors Ltd v Tower Hamlets London Borough Council[1976] 1 WLR 852CB(2)Woolfson v Strathclyde Regional Council1978 SC (HL) 90(2)Montevento Holdings Pty Ltd v Scaffidi [2012] HCA 48To what extent does this case overruleSmith, Stone & Knight Ltd v Birmingham Corporation?CB(1)Prest v Petrodel Resources Ltd[2013] UKSC 34, [2013] 3 WLR 1.CB(1)Re Securitibank Ltd(No 2)[1978] 2 NZLR 136 (CA) at 157-159 and 171(2)Savill v Chase Holdings (Wellington) Ltd[1989] 1 NZLR 257 at 277282(2)Adams v Cape Industries plc[1990] Ch 433 (CA) at 532544(2)Hadoplane Pty Ltd v Edward Rushton Pty Ltd[1996] 1 Qd R 156 (CA)(2)Repatriation Commission v Harrison(1997) 24 ACSR 711 (FCA)(2)Body Corporate No 188273 v Leuschke Group Architects Ltd(2007) 8 NZCPR 914 at [37][39](2)OA vSanctuaryPropvest LtdHC-Auckland, CIV 2009-404-852, 11/6/2009, Asher J

2.6.2 Under statute

CA93, s 25, and ss 271272CB(2)HEB Contractors v Westbrook Development Ltd(2000) 8 NZCLC 262,256(2)Mountfort v Tasman Pacific Airlines of NZ Ltd[2006] 1 NZLR 104 at [80]

2.7 Corporate Agents Personal liability

Only breaches to of duties owed to 3rdparties outside of corporate structure -

Directors Powers and Duties

A Company cannot act except through its members( agents, employees etc.). However, liability for agents actions is not attributable to the company, rather it is dealt with by the common law, relevant to the actor themselves. The issue is that the common law is still confused about this.The test is by the civil wrong, it is completely separate from agency or company law

Limited liability does not protect shareholders from personal liabilityS 97(3) CA a shareholder is only protected in that capacity, if they act as an agent of the company they are outside of that, and can face personal liability

2.7.1 Liability for general civil wrongs

Orthodoxy vs. Disattribution HeresyTrevor Ivory Ltd v Anderson[1992] NZ Court of Appeal

FACTS: Trevor was the director of a one man company. The company gave advice how to remove weeds. T gave advice to the Andersons to use Roundup to remove weeds on their orchard. He failed to tell them not to spray it on the raspberries. The raspberries died and they lost their crop. A sued for breach of contract for failing to provide proper advice, and in tort for negligent misstatement. Sued both the company and T personally.ISSUE: Company was liable in contract and negligence, but was T (director) liable in negligence?HELD: Unanimously held that T was not personally liable. 3 different views:McGechan J - ORTHODOX GROUND(use this decision!) looked at the elements of the tort of negligence. Had T assumed responsibility and had A placed reasonable reliance on that statement? On the facts, T failed to assume personal responsibility.

Hardie Boys J NON-ORTHODOX - directing mind and will approach, using the attribution test ofLeonards Carrying. As T was acting as the company, he wasnt acting as himself and was not liable for his own actions. Known as disattribution heresy. The assumption of responsibility test does not reflect a requirement of the law of tort, but rather company law.

Presumptive immunity of directors because they are identified as directing mind and will.While a subsequent CA decision,Watson v Dolmark, distinguishedTrevor Ivoryon this basis: a case of personal dishonesty is distinguishable from the question whether the owner of a one-man company comes under a duty of care

Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 (CA)

Managing director of company (and major shareholder) faced action for negligent misstatement by director of one man company

Company enter agreement with AGENT for paid consultancy

In consult, company provided advice on how to deal with cooch grass using their product

Agent advised to use their product, but not HOW to use it, or that it would kill his raspberry plants killed raspberry plants

He replanted boysenberries and sued Mr Ivory personally for negligent misstatement and breach of contract

Issue at trial: Was the advice negligent?

Held: Company was liable in negligence and contract, and director liable in negligence

Appealed by Director Issue Was the director personally liable for the negligent advice?

CA unanimous: upheld appeal-Mr Ivory, the director, could not be held personally liable for the advice he gave pursuant to the companys contract or negligence

Issue 3 Possible grounds for the finding:1)McGechan J Orthodox approach:It must be shown that Mr Ivory PERSONALLY ASSUMED RESPONSIBILITY for that advice company law is irrelevant to this question it is reliant solely upon the relevant tortious principles

Application: hard to show that one man company director was taking personal responsibility for advice the faith of the plaintiffwas in the man, not the company.

2) Hardie Boys J -directing mind and will approach-> DISATTRIBUTION HERESYAs directing mind and will of the company, the director was the embodiment of the company,thus his actions are the companys and not his own

ISSUE WITH THIS APPROACH DISATTRIBUTION HERESYThis means the actors actions become DISATTRIBUTED to himself, and instead attributed to the company

This means you must show that he was the acting mind and will of the company and had ASSUMED responsibility for the agents actions

2.8 The Problem of Phoenix Companies

Phoenix company = arises out of theashes of a former companyIssue whether directors can be liable for ceasing to trade when they should have kept going Nothing in the Companies Act requires a business to continue trading, even ifsuccessful, to continue trading

2.8.1 Common LawIssue former creditors are left out in the cold as there is no duty at Common Law or instatute that PREVENTS a phoenixco being created by the SH/directors of the former company, nor obliges them to continue working to pay off the debts ofthe previous company. There is also nothing preventing the resigned directors from enticing former employees to work for thephoenix coEven where a business is profitable, without any issue of financial difficulty,shareholders have rightto liquidate the co at any timeCB(1)Creasey v Breachwood Motors Ltd[1993] BCLC480 (overruledin (2)Ord v Belhaven Pubs Ltd[1998] 2 BCLC447 (CA))Creaseyis only one of several variants of the phoenix phenomenon. Often there are even more creditors who are left out in the cold. Sometimes the shareholders/directors notonly leave creditors without assets, but use the assets to pay debts owed to themselves by the company.The shareholders/directors are not always as culpable as they were inCreasey sometimes they simply find that their company goes into insolvent liquidation, and they then set up a second company through which to continue their business.

Try to distinguish the different concerns that creditors may have in these variants. Do you think that lifting the corporate veil is an appropriate way to respond to them?

CB(2)Lion Nathan Ltd v Lee(1997) 8 NZCLC 261,360evidence fell shortof providing a foundation from which it could be inferredthat directors had deliberately and knowingly set out to cheat or defraud LN in terms of s320(1)(c)- not seeking to benefit themselves- commercial reality that trust's loanhad to be repaid in full for refinancing with ANZ- LN wouldn't have received anything had the Co been liquidated, and the Directors actions did nothing to worsen this reality

CB(1)Gray v Wilson(1998) 8 NZCLC 261,530

CB(2)Sojourner v Robb, Re Kut PriceYachts Ltd[2008] 1 NZLR 751 (CA)(HC decision upheld on issue of sale at an undervalue of business to a phoenix company)

CB(2)Re Gellert Developments Ltd(2002) 9 NZCLC 262,942

Mr &Mrs G only SH and directors of GDL, shopfitting business- Mr G governing directors;Mrs G resigned director, June 1992 cont managerial position- Feb 1992 oral arrangment to share profits with Mr H, director of SCL ended July 1993- Disputedamount owed by GDL to SCL SCL claimed in DC, determining a partnership between GDL and SCL, in favour of SCL- GDL ceased trading assets transferred to new company G's drawing acc debited with value of assets but no consideration for goodwill- GDL later liquidated, liquidator applied ofr an order of payments/contributions by G's under s301 Co Act 1993Liquidator claimed G's paid themselves excessive salaries, effectively removing profits and assets from GDL, and causing an insufficiency of fundsto meet debts owed to SCL misapplication of property of the company and breach of fidcuiary duties of Dr and SH reckless trading negligence breach s161 Act re authorisation of payments

Found excessive salaries, allocated all profits to salaries not acceptable for an insolvent co with unpaid creditors-no breach of directors duty re SH drawings,as no loss to Co as consequence(Obiter problematic if amounts owing to Co by SH's re the current accounts are treated as assets of the co, but prove difficult to recover on liquidation)- Failed test what an ordinary prudent director could be expected to assess in all circumstances in making a reasonable judgement as to the provision in the Co's accounts for liability to debtor (SCL)- TRANSFER OF ASSETS TO NEW CO WAS NOT AT UNDERVALUE transfer not in breach of director's duties to Co- s161 subj to s107(1)(f)- Breaches of directors duties re (I) reversal of acc payable re Harrison to act as a reasonable and prudent director- payingthemselves salaries putting the solvency of the co at risk, prejudicial to interests of SCL as creditor of the Co- resolving to cease trasing ans transfer assets of co to a new co without making reasonable provision for SCL as creditor of Co

(2)Campbell Creditors Actions in Respect of Insolvent Companies [1998] CSLB 143See also section 9.3.4 of this outline

2.8.2 Phoenix Company Provisions

Phoenix Company provisionsss386A386F (as added by Companies Amendment Act 2006)CB(2)Ricketts vAd Valorem Factors Ltd[2003] EWCA Civ 1706; [2004] 1 BCLC 1(2)Keeper, The New Order of the Phoenix (2008) 14 NZBLQ 21

2.9 Reflecting on Corporate PersonalityA review of the issues