2) Corporate Personality Flashcards
Limited Liability
All debts incurred by a company are the company’s liabilities and are not the liabilities of the shareholders or the directors.
A company’s liability is limited
Shareholders are not liable to pay debts which the company owes.
Creditors to whom the company owes money must….
Creditors to whom the company owes money must claim against the company
The extent of shareholder liability
- The amount they have invested in subscribing the company’s shares.
- Liable for any payment they’ve not yet made.
Section 74 Insolvency Act 1986
Enshrines the concept of limited liability, confirming that the shareholders of a limited company are not liable to a liquidator in the event of insolvency.
Separate Personality of a Company
A company is a distinct legal entity with a separate legal entity.
Concepts fundamental to company law
- Separate corporate personality
- Related issue of limited liability
Directors owe duty to…
Directors owe duty to the company not the shareholders.
Shareholders have rights…
Shareholders usually have rights against the company and third parties with whom the company does business.
Not the company
Shareholders and/or directors are….
CHANGEABLE
Significance of limited liability
Quality that has enabled companies to become useful commercial tools.
Personal assets are entirely separate from company assets.
Concept of limited liability is fundamental…
- Passive Investment
- Entrepreneurial spirit
- Groups of companies
Passive Investment
Shareholders invest in a company following an assessment of the risks of losing that investment, without risking personal assets or having to mange.
Entrepeneurs
Often seek to conduct business through the medium of a limited liability company
Group companies
Riskier business divisions can be conducted through separate companies within the group, without less risky companies becoming vulnerable to ctreditors
Consequences of separate legal personality
- Owns its own property
- Enter into contracts
- Sues and can be sued on its own liabilities
Company Owns its own property
Property of a company belongs to the company itself and not to the shareholders.
Macaura v Northern Assurance Co 1925
Macaura v Northern Assurance Co 1925
HoL held that timber belonged to the company and not to Macaura, therefore he was unable to claim on his own insurance policy
Company enters into its own contracts
On its own behalf and benefits and liabilities under the contract belong to the company.
This is true even where the company is a sole director.
Lee v Lee’s Air Farming Ltd 1961
Lee v Lee’s Air Farming Ltd 1961
- Lee was killed in a plane crash.
- Widow brought a claim under Worker’s Compensation Act 1922
- Privy Council held that under his contract L was a “worker” as defined under the Companies Act 1922.
- Entitled to compensation, despite shareholder and director
Company sues and is sued on its own liabilities
Adams v Cape Industries 1990
Adams v Cape Industries 1990
*Asbestosis workers sued Cape and NAAC in a Texas Court
* Lack of duty of care
* CoA considered whether the judgment could be enforced against the wealthier parent company Cape.
* NAAC wound up
* CoA rejected all arguments that judgment could be enforced against Cape
Claimant argument in Adam v Cape
- Cape and subsidiaries should be treated as a single economic unit.
- Subsidiaries used as a facade concealing the true facts
- Agency relationship existed between Cape and NAAC
Legal Personality
Section 16 CA 2006
A company becomes a body corporate capable of exercising the functions of an incorporated company from the date of incorporation.
Incorporation
Date on which the Registrar issues the certificate of incorporation
Advantages of limited liability
- encourages businesses to take risk and generate money
- creditors are aware that they are contracting with a limited company - can assess financial viability of company
s59 and s60
All limited companies must end limited or ltd
Disadvantages of limited liability
- Creditors of companies and claimants risk being unable to receive monies
- Accounts only filed once a year - therefore may not be representative
- Some cases of “piercing the veil
Veil piercing or lifting
Courts may go behind the corporate framework and the company’s legal personality to make the shareholders of a company liable
Exception to the rule that shareholders liability is limited to any unpaid amount owing on their shares
Veil piercing or lifting
Prior to Prest v Petrodel
Some uncertainty and inconsistency in the case law as to whether piercing the corporate veil existed.
Narrow jurisdiction
Supreme Court in Petrodel
Clarified that piercing corporate exists;
Court may pierce the corporate veil only where a person under an existing legal obligation or restriction deliberately evades or frustrates that obligation by setting up a company.
When courts have concluded that the corporate veil should be pierced
Members have been found liable only to the extent required to right the wrong.
Cases up to 2013 can be divided into three broad categories
Piercing the veil
- Application of statute
- Common Law
- Application of a contractual term (intention of parties - rare)
Statutory examples - when a company can be treated by statute as liable for piercing the corporate veil
- Tax
- Employment
- Corporate Insolvency.
Look into further
Common Law
Little consistency prior 2013. Cases:
* Facade/sham
* Single economic entity
* Agency
* Tort
Facade or sham cases
- Gilford Motor Co Ltd v Horne 1933
- Jones v Lipman 1962
- Trustor AB v Smallbone 2001
Gilford Motor Co Ltd v Horne
1933
- Former employee bound not to solicit customers from former employees
- Set up a company
- Company held to be a front or sham preventing trading
Jones v Lipman
1962
- L entered into a contract with J for the sale of land.
- L formed a company in order to avoid the transaction and transferred the land to the company
- Court found the company was a facade
Order for specific performance
Trustor AB v Smallbone (No2) [2001]
- S was the former managing director of T and had transferred £20 mill into a company he owned and controlled.
- T applied to the court to pierce the veil as company a sham.
- Court found the company was a sham. Court could lift the veil.
Single Economic Entity
- Group structures, where claimants sought to make parent companies liable for the debts and obligations of their subsidiaries.
- Not abasis for piercing the corporate veil.
Key cases - Single Economic Entity
- DHN Food Distributors v Tower Hamlets (1976)
- Woolfson v Strathclyde Regional Council (1978)
- Adams v Cape Industries Plc (1990)
DHN Food Distributors Ltd v Tower Hamlets [1976]
LJ Denning held that a group of companies is a single economic unit and should be treated as such.
Woolfson v Strathclyde Regional Council [1978]
HoL doubted Denning’s decision in DHN and
* veil of incorporation will be upheld unless it is a sham or facade specifically for the purposes of avoiding liability
* confirming that each company in a group is its own distinct entity.
Adams v Cape Industries Plc 1990
- CoA refused to allow the corporate veil to be lifted
- Enterprises put risk ventures/liability in subsidiary companies
Agency - liability based on law of agency
- Although possible, no presumption this is the case.
- Based on the common law of agency
- Difficult to establish without express agreement
- Based on the law of agency, not a true example of piercing the veil.
Salomon Agency
Expressly disregard the Agency argument based on the facts.
Tort - Key Case
Parent companies may be liable to those dealing with their subsidiaries on the basis of tort, this is not an example of lifting the corporate veil.
VTB Capital plc v Nutritek Int Corp and others
VTB Capital plc v Nutritek Int Corp and others
- VTB lent Russagroprom LLC money to fund the acquisition of six Russian dairy plants and three associated companies from Nutritekk
- RAP defaulted on the loan
- Claimed that RAP under the control of the defendent Nutritek
- wanted to pierce the veil on the basis of agency
Chandler v Cape Plc 2012
- Parent company was liable in tort for asbestos related injuries suffered by the employees.
- Conditions needed for the liability
- both companies in the same line of business
- parent company more experience of the industry & H&S
- Subsidiary’s system was unsafe and Parent knew this
- Parent company ought to have forseen that subsidiary and employees would rely on Parent’s knowledge
Issue of whether English parent company may owe a dity of care to people in an overseas subsidiary
Litigated extensively in recent years
Lungowe v Vendanta Resources Plc* 2019
Okpabi v Royal Dutch Shell plc 2021
Lungowe v Vendanta Resources Plc
2019
English parent company of a Zambian subsidiary was held to owe a duty of care to the claimants, a neighboring community
* Parent company intervened sufficiently for it to assume a duty of care
- Establishing group-wide environmental control and sustainability standards
- For their implementation throughout the group by training
- Monitoring and enforcement
- Management agreement between parent and subsidiary
Okpabi v Royal Dutch Shell Plc 2021
The SC held that an English parent company of a Nigerian subsidiary company may owe duty of care to local inhabitants harmed by an oil leaking.
- Responisbility to the extent Parent assumes responsibility for managing the relevant activity
- Duty of Care incurred by
* Maintaining groupwide env and safety policies and guidelines which impose mandatory standards
* The parent company monitors and reports on subsidiary’s compliance
* Parent company’s CEO has overall responsibility for groupwide H&S standards
Prest v Petrodel Resources Ltd 2013 - THE FACTS
- Assets in a divorce
- Husband wholly owned and controlled a group of companies which owned residential properties worth over £50 million, including the matrimonial home
- Wife sought to order transfer of properties to her on the basis they were held by companies on trust
Prest v Petrodel Resources Ltd 2013 - AFFIRMED
- Affirmed the principle in Salomon - distinct legal entity cant pierce the veil
Prest v Petrodel Resources Ltd 2013 - CHALLENGES
Two principles that enable the Salomon principle of separate legal entity
* Concealment Principle
* Evasion Principle`
Concealment Principle
Does not involve piercing the corporate veil.
* Corporate structure conceals real actors
* Court looks behind structure to discover real facts.
Evasion Principle
Court may pierce corporate veil if person deliberately attempts to evade a legal obligation they are under by interposing a company that he controls
Gilford Motor Co Ltd v Horne 1933
Gilford Motor Co Ltd v Horne 1933 - Principle
Court may pierce corporate veil if person deliberately attempts to evade a legal obligation they are under by interposing a company that he controls.
Gilford Motor Co Ltd v Horne 1933
Lord Sumption concluded….
corporate veil can only be pierced to prevent the abuse of corporate legal personality, where someone deliberately frustrates the enforcement of an alternative remedy by putting a company in place.
If there is another legal remedy available…
Piercing the corporate veil may not necessarily be available
Prest - HELD
- No impropriety in the company holding properties for tax purposes
- Piercing the corporate veil was not necessary
- However was held that the company was held on trust for the husband as beneficiary.
- Order made for the sale of the property
Following Prest v Petrodel
- SC reviewed historic cases and stated in each case liability could be established under general principles without the need for the corporate veil to be lifted
Extremely rare that piercing the veil will be invoked* usually….
- Where other routes iferring liability on shareholders are available
- Such as tortious liability or the law of trust or agency then do not ignore the company’s separate legal person.
The courts will infer liability on these principles.
Prest eg Antonio Gramsci Shipping Corpn v Recoletos Ltd 2013
- Contract contained an exclusive English juridiction clause.
- CoA following Prest held that the corporate veil could not be pierced to regard the company’s controller as having consented to the English jurisidiction
Hurstwood Properties Ltd v Rosendal BC 2021
Supreme Court refused to pierce the veil because another remedy was available under statute
* Liability for tax remained with Hurstwood under s45 and s65 Local Government Finance Act 1988
* No need to * pierce the veil*
Hurstwood Properties Ltd v Rosendal BC 2021 - Supreme Court Doubts
Shared Lord Walker’s doubts in Prest, as to whether piercing the corporate veil is a coherent principle of law at all.
Perhaps further reduce possibilities to pierce the veil
Hurstwood Properties Ltd v Rosendal BC 2021 - HELD
Facts did not justify piercing the veil as the evasion ground requires imposing a company to avoid liability.
Here the abuse was that the companies were wound up or dissolved to avoid liability
Piercing the corporate veil is an exception to…
the fundamental principle in Salomon that shareholders liability is limited
Following Prest v Petrodel the position is that a court…
may pierce the corporate veil only where a person under an existing legal obligation or restriction deliberately evades or frustrates that obligation/restriction by setting up a company
Shareholders or parent companies may incur liability arising out of the acts of company…
Liability arises under
* a specific statute
* Tort
* under the law of agency
not from the piercing of the veil
