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Company Law > 2) Corporate Personality > Flashcards

2) Corporate Personality Flashcards

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1
Q

Limited Liability

A

All debts incurred by a company are the company’s liabilities and are not the liabilities of the shareholders or the directors.

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2
Q

A company’s liability is limited

A

Shareholders are not liable to pay debts which the company owes.

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3
Q

Creditors to whom the company owes money must….

A

Creditors to whom the company owes money must claim against the company

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4
Q

The extent of shareholder liability

A
  • The amount they have invested in subscribing the company’s shares.
  • Liable for any payment they’ve not yet made.
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5
Q

Section 74 Insolvency Act 1986

A

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.

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6
Q

Separate Personality of a Company

A

A company is a distinct legal entity with a separate legal entity.

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7
Q

Concepts fundamental to company law

A
  • Separate corporate personality
  • Related issue of limited liability
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8
Q

Directors owe duty to…

A

Directors owe duty to the company not the shareholders.

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9
Q

Shareholders have rights…

A

Shareholders usually have rights against the company and third parties with whom the company does business.

Not the company

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10
Q

Shareholders and/or directors are….

A

CHANGEABLE

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11
Q

Significance of limited liability

A

Quality that has enabled companies to become useful commercial tools.

Personal assets are entirely separate from company assets.

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12
Q

Concept of limited liability is fundamental…

A
  • Passive Investment
  • Entrepreneurial spirit
  • Groups of companies
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13
Q

Passive Investment

A

Shareholders invest in a company following an assessment of the risks of losing that investment, without risking personal assets or having to mange.

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14
Q

Entrepeneurs

A

Often seek to conduct business through the medium of a limited liability company

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15
Q

Group companies

A

Riskier business divisions can be conducted through separate companies within the group, without less risky companies becoming vulnerable to ctreditors

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16
Q

Consequences of separate legal personality

A
  • Owns its own property
  • Enter into contracts
  • Sues and can be sued on its own liabilities
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17
Q

Company Owns its own property

A

Property of a company belongs to the company itself and not to the shareholders.

Macaura v Northern Assurance Co 1925

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18
Q

Macaura v Northern Assurance Co 1925

A

HoL held that timber belonged to the company and not to Macaura, therefore he was unable to claim on his own insurance policy

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19
Q

Company enters into its own contracts

A

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

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20
Q

Lee v Lee’s Air Farming Ltd 1961

A
  • 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
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21
Q

Company sues and is sued on its own liabilities

A

Adams v Cape Industries 1990

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22
Q

Adams v Cape Industries 1990

A

*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

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23
Q

Claimant argument in Adam v Cape

A
  • 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
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24
Q

Legal Personality

A
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25
Q

Section 16 CA 2006

A

A company becomes a body corporate capable of exercising the functions of an incorporated company from the date of incorporation.

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26
Q

Incorporation

A

Date on which the Registrar issues the certificate of incorporation

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27
Q

Advantages of limited liability

A
  • 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
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28
Q

s59 and s60

A

All limited companies must end limited or ltd

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29
Q

Disadvantages of limited liability

A
  • 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
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30
Q

Veil piercing or lifting

A

Courts may go behind the corporate framework and the company’s legal personality to make the shareholders of a company liable

31
Q

Exception to the rule that shareholders liability is limited to any unpaid amount owing on their shares

A

Veil piercing or lifting

32
Q

Prior to Prest v Petrodel

A

Some uncertainty and inconsistency in the case law as to whether piercing the corporate veil existed.
Narrow jurisdiction

33
Q

Supreme Court in Petrodel

A

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.

34
Q

When courts have concluded that the corporate veil should be pierced

A

Members have been found liable only to the extent required to right the wrong.

35
Q

Cases up to 2013 can be divided into three broad categories

A
  • Application of statute
  • Common Law
  • Application of a contractual term (intention of parties - rare)
36
Q

Statutory examples - when a company can be treated by statute as liable for piercing the corporate veil

A
  • Tax
  • Employment
  • Corporate Insolvency.

Look into further

37
Q

Common Law

A

Little consistency prior 2013. Cases:
* Facade/sham
* Single economic entity
* Agency
* Tort

38
Q

Facade or sham cases

A
  • Gilford Motor Co Ltd v Horne 1933
  • Jones v Lipman 1962
  • Trustor AB v Smallbone 2001
39
Q

Gilford Motor Co Ltd v Horne
1933

A
  • Former employee bound not to solicit customers from former employees
  • Set up a company
  • Company held to be a front or sham preventing trading
40
Q

Jones v Lipman
1962

A
  • 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
41
Q

Trustor AB v Smallbone (No2) [2001]

A
  • 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.
42
Q

Single Economic Entity

A
  • 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.
43
Q

Key cases - Single Economic Entity

A
  • DHN Food Distributors v Tower Hamlets (1976)
  • Woolfson v Strathclyde Regional Council (1978)
  • Adams v Cape Industries Plc (1990)
44
Q

DHN Food Distributors Ltd v Tower Hamlets [1976]

A

LJ Denning held that a group of companies is a single economic unit and should be treated as such.

45
Q

Woolfson v Strathclyde Regional Council [1978]

A

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.

46
Q

Adams v Cape Industries Plc 1990

A
  • CoA refused to allow the corporate veil to be lifted
  • Enterprises put risk ventures/liability in subsidiary companies
47
Q

Agency - liability based on law of agency

A
  • 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.
48
Q

Salomon Agency

A

Expressly disregard the Agency argument based on the facts.

49
Q

Tort - Key Case

A

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

50
Q

VTB Capital plc v Nutritek Int Corp and others

A
  • 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
51
Q

Chandler v Cape Plc 2012

A
  • 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
52
Q

Issue of whether English parent company may owe a dity of care to people in an overseas subsidiary

A

Litigated extensively in recent years
Lungowe v Vendanta Resources Plc* 2019

Okpabi v Royal Dutch Shell plc 2021

53
Q

Lungowe v Vendanta Resources Plc
2019

A

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

54
Q

Okpabi v Royal Dutch Shell Plc 2021

A

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

55
Q

Prest v Petrodel Resources Ltd 2013 - THE FACTS

A
  • 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
56
Q

Prest v Petrodel Resources Ltd 2013 - AFFIRMED

A
  • Affirmed the principle in Salomon - distinct legal entity cant pierce the veil
57
Q

Prest v Petrodel Resources Ltd 2013 - CHALLENGES

A

Two principles that enable the Salomon principle of separate legal entity
* Concealment Principle
* Evasion Principle`

58
Q

Concealment Principle

A

Does not involve piercing the corporate veil.
* Corporate structure conceals real actors
* Court looks behind structure to discover real facts.

59
Q

Evasion Principle

A

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

60
Q

Gilford Motor Co Ltd v Horne 1933 - Principle

A

Court may pierce corporate veil if person deliberately attempts to evade a legal obligation they are under by interposing a company that he controls.

61
Q

Gilford Motor Co Ltd v Horne 1933

A
62
Q

Lord Sumption concluded….

A

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.

63
Q

If there is another legal remedy available…

A

Piercing the corporate veil may not necessarily be available

64
Q

Prest - HELD

A
  • 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
65
Q

Following Prest v Petrodel

A
  • 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
66
Q

Extremely rare that piercing the veil will be invoked* usually….

A
  • 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.
67
Q

Prest eg Antonio Gramsci Shipping Corpn v Recoletos Ltd 2013

A
  • 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
68
Q

Hurstwood Properties Ltd v Rosendal BC 2021

A

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*

69
Q

Hurstwood Properties Ltd v Rosendal BC 2021 - Supreme Court Doubts

A

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

70
Q

Hurstwood Properties Ltd v Rosendal BC 2021 - HELD

A

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

71
Q

Piercing the corporate veil is an exception to…

A

the fundamental principle in Salomon that shareholders liability is limited

72
Q

Following Prest v Petrodel the position is that a court…

A

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

73
Q

Shareholders or parent companies may incur liability arising out of the acts of company…

A

Liability arises under
* a specific statute
* Tort
* under the law of agency

not from the piercing of the veil

Company Law (11 decks)

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