3 - Incorporation and corporate personality

Question 1

Who are known as ‘promoters’?

Answer 1

Persons in the process of setting up a company - though this does not include persons involved by virtue of their professional duties

Question 2

Key duty of a promoter

Answer 2

Fiduciary duty in relation to the unformed company - ie. cannot make a profit out of promotion unless they disclose nature of transaction and profit made to independent people

Question 3

What is the key result of a promoter breaching fiduciary duties in a transaction?

Answer 3

The transaction becomes voidable, and can be rescinded by the company

Question 4

Does a pre-incorporation contract bind a company on incorporation?

Answer 4

No

Question 5

Where in CA 2006 does it say that a promoter is liable for pre-incorp contract (if enforced by third party)?

Answer 5

S. 51(1)

Question 6

What is the flaw in S. 51(1)?

Answer 6

It doesn’t state whether a promoter can enforce a contract against third party

Question 7

What does case law say on promoter enforcing contract against third party?
What was case callled?

Answer 7

Braymist Ltd v Wise Finance Co Ltd
It was concluded that it must have been parliament’s intention that the contract was enforceable both ways, as otherwise it could not take effect

Question 8

3 instances where s.51 does not apply

Answer 8

Company existed and was then bought ‘off the shelf’

The company is now dissolved

It is expressed in the contract that the promoter is not liable

Question 9

2 ways in which company can be bound by pre-incorporation contract?

Answer 9

Contract provides that the promoter will cease to be liable if the company enters into contract with third-party on same terms

Novation-
Company, promoter and third party enter into agreement which provides that pre-incorp contract will be discharged and a new agreement entered into

Question 10

What is an ‘off the shelf’ company’?

Answer 10

A company that is already created and left dormant, until such time as they are purchased, and then transferred to the buyer

Question 11

Which companies require a trading certificate?

Answer 11

Public companies

Question 12

Which form is required to apply for a trading certificate?

Answer 12

Form SH50

Question 13

How long after a PLCs incorp, may it be wound up by court if no trading certificate?

Answer 13

1 year

Question 14

What does a statement of compliance state?

Answer 14

Requirements of CA 2006 have been complied with

Question 15

What is meant by corporate personality?

Answer 15

The fact that a company is a person

Question 16

What is meant by ‘individual’ in law?

Answer 16

Natural persons only

Question 17

What is meant by ‘person’ in law?

Answer 17

Natural person or a legal person (companies, LLPs)

Question 18

One way in which a company is a legal person differs to natural person in law?

Answer 18

Cannot be convicted of offence for which the only punishment is imprisonment, such as murder

Question 19

Can companies enter into contracts with persons within it?

Answer 19

Yes

Question 20

For what reason is a company’s residence relevant?

Answer 20

Tax liabilities

Question 21

How is a company’s residence determined?

Answer 21

By where is ‘really keeps house and does business’ as ‘where the central management and control actually abides’

Question 22

Case which shows significance of corporate personality

Answer 22

Salomon v A Salomon & Co Ltd

Question 23

Brief description of Salomon v A Salomon & Co Ltd

Answer 23

Bootmaker incorporated company to carry on his business.
Company failed and wound up debts.
Salomon initially held liable but this was overruled by House of Lords

Question 24

3 points of significance of Salomon v A Salomon & Co Ltd

Answer 24

Recognition that company could legitimately shield members from liability

Validity of one-person company (which it was effectively) recognised implicitly almost century before formally possible

Recognised relationship of agency or trusteeship is not established simply because a person holds shares in a company

Question 25

What is meant by ‘lifting’ or ‘piercing’ the corporate veil?

Answer 25

Disregarding a company’s corporate personality - imposing liability on directors, members or other relevant persons

Question 26

Three ways in which corporate personality can be disregarded

Answer 26

By statute
By common law
By contract

Question 27

3 prohibitions/limitations on company names

Answer 27

• Cannot be offensive
• Cannot be too similar to existing name
• Cannot contain words or phrases which infringe upon intellectual property rights of others (promoters should ensure this as CH will not)

Question 28

2 examples of ways corporate personality can be taken away by statute (statutory provisions)

Answer 28

• Public company does business before being issued trading certificate
• Fraudulent traders will have committed an offence and will be ordered to contribute to assets of company

Question 29

2 examples of ways corporate personality can be taken away by common law

Answer 29

• Where the company was being used to perpetrate a fraud, was a facade or a sham
• Where a subsidiary is an agent of the parent

Question 30

Petrodel Resources Ltd v Prest - when did the Court say was the only instance in which the courts could ‘pierce the veil’? (‘evasion principle’)

Answer 30

Where ‘a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control’
providing ‘all other, more conventional, remedies have proved to be no assistance’

Question 31

Evasion principle broken down - 3 criteria

Answer 31

1. Must be an exiting legal obligation, liability or restriction placed on X
2. X must interpose a company in order to frustrate the obligation, liability or restriction
3. The company being interposed by X must be under X’s control

*Further to this, ‘all other, more conventional, remedies have proved to be no assistance’ for corp personality to be disregarded

Question 32

What is the Duty of Care in relation to corp personality?

Answer 32

Duty of Care care can be imposed on a parent (such as if employee of subsidiary sustains injuries)

Question 33

4 conditions required for Duty of Care to apply (parent responsible for H&S of subsidiary)

Answer 33

• Businesses of parent and subsidiary are effectively the same
• Parent ought to have superior knowledge of aspect of health and safety
• Subsidiary’s system of work is unsafe as parent knew or ought to have known
• Parent knew or ought to have foreseen that employees would rely on knowledge for protection

Question 34

Example of circumventing corp personality via contract

Answer 34

Director or member guaranteeing a loan made to a company

Question 35

4 methods used to impose liability on a company

Answer 35

• Personal liability
• Strict liability
• Vicarious liability
• Attribution