3. Incorporation and corporate personality Flashcards
What is a promoter?
Promoter is a fiduciary.
Duties: Loyalty and Good faith
Someone who engages in business operations by which a company is brought into existence.
How does s.51 of CA2006 differ to the common law rules relating to pre-incorporation contract?
S51 of CA2006 states that the promoter is personally bound to contract.
Under common law, whether the promoter was bound to pre-incorporation contract would depend on the intention of the parties as evidenced in contracts.
How can a company be bound by a pre-incorporation contract?
The company can be bound in 2 ways:
- Pre-inc contract contain a term, which provides that upon incorporation the promoter will cease to be liable under the contract (if the terms of the contract are the same as the pre-inc contract).
- Novation contract - Following incorporation, the company, the promoter and third party enter into an agreement that which provides that the pre-inc contract will be discharged, and a new agreement will be entered into (novation).
When will a pre-incorporation contract not be a subject to s.51 of the CA2006?
s51 does not apply if:
- Company bought off the shelf, but was in the existence when the contract was entered into.
- the Co once existed, but has since been dissolved.
What doc must be submitted to Companies House to incorporate a company by registration?
Memorandum of association
Application for registration (IN01)
Statement of compliance
What info does IN01 require?
IN01 must have:
Public or private co
limited or unlimited
name
registered address
if there is share capital - a statement of capital and initial shareholdings
- if co is limited by guarantee - a statement of guarantee
- a statement of the officers
- a statement of significant control
- a copy of Articles
- type of co and intended business activities
What is off-the-shelf com and what are the advantages?
When agents register the com and leave it dormant until it’s purchased
Upon incorporation, the agent will inform the CHouse of the relevant changes (change of directors, registered office and so on).
Benefits: the promoter does not need to incorporate the co, quick and inexpensive
Corporate personality
Corporate personality - company is a PERSON Unincorporated structures are not persons (sole traders and partnerships) Key consequences: HAS NATIONALITY, DOMICILE, RESIDENCE PERPETUAL SUCCESSSION CONTRACTUAL CAPACITY OWNERSHIP OF ASSETS CAN UNDERTAKE OWN BUSINESS CAN CREATE OTHER BUSINESS STRUCTURES CAN SUE AND BE SUED HAVE HUMAN RIGHTS
Lee v Lee Farming Ltd
Christina v Seear
Why Salomon is considered a seminal case?
Co can be used to shield members’ assets from liability
Recognised validity of one-person company
The fact that Persons holding shares is not enough to establish a relationship of agency or trusteeship
When will the court disregard a company’s corporate personality?
The court will pierce the veil:
- when provided by statute
- where a person is under the existing legal obligation which they deliberately evade or whose enforcement they deliberately frustrate by interposing a company under their control, and all other remedies proved to be of no assistance
What are the 3 conditions for the evasion principle to apply?
- An existing legal obligation is placed upon a person X
- X interposes a company in order to evade or frustrate the obligation or liability
- The company being interposed is under the X’s control.
Corporate liability
4 forms: Personal liability Civil liability Strict liability - all that needs to be established that prohibited act was engaged in Vicarious liability Attribution
What does the case of Erlanger provide?
Phosphate sued Erlanger for recession due to non-disclosure and an account of profits (sold the lease for double the price to Phosphate co). Board had ratified the sale because the board was not independent.
Issues
Was Erlanger liable to Phosphate due to not disclosing to his conflict of interest?
Decision
Erlanger was a promoter for Phosphate. The House of Lords unanimously held that the relationship between a promoter and a newly formed company attracts a fiduciary relationship.
A promoter owes duties of good faith and honesty to the company.
Erlanger should have declared any conflicting interests to the company promoted and cannot make any “secret profits”.
A promoter who breaches any duty to the company by failing to disclose to the company conflicting interests would be liable. The company is able to seek remedies such as rescission of contract and recovery of profits.
A constructive trust can also be formed for the profits gained by the promoter in breach of his or her duties.
Trading certificate
What are penalties trading without trading certificate?
Liable to fine
Court may grant a liquidation order
What are the advantages of being a Company as Distinct from Partnership?
1. Separate legal identity 2 Limited liability 3 Perpetual existence 4. Raising finance i. secure debt by way of floating charge ii. invite the public to subscribe for shares (plc) 5. Ownership of property 6. Transfer of interest
Disadvantages
- Legal implications
i. formation
ii. audit
iii. share issues
iv. meetings and resolutions
v. liquidation
vii. proper accounting records - Expense
- Publicity and disclosure
i. Details of remuneration
ii. Business details
