3 - Incorporation and corporate personality Flashcards
Who are known as ‘promoters’?
Persons in the process of setting up a company - though this does not include persons involved by virtue of their professional duties
Key duty of a promoter
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
What is the key result of a promoter breaching fiduciary duties in a transaction?
The transaction becomes voidable, and can be rescinded by the company
Does a pre-incorporation contract bind a company on incorporation?
No
Where in CA 2006 does it say that a promoter is liable for pre-incorp contract (if enforced by third party)?
S. 51(1)
What is the flaw in S. 51(1)?
It doesn’t state whether a promoter can enforce a contract against third party
What does case law say on promoter enforcing contract against third party?
What was case callled?
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
3 instances where s.51 does not apply
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
2 ways in which company can be bound by pre-incorporation contract?
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
What is an ‘off the shelf’ company’?
A company that is already created and left dormant, until such time as they are purchased, and then transferred to the buyer
Which companies require a trading certificate?
Public companies
Which form is required to apply for a trading certificate?
Form SH50
How long after a PLCs incorp, may it be wound up by court if no trading certificate?
1 year
What does a statement of compliance state?
Requirements of CA 2006 have been complied with
What is meant by corporate personality?
The fact that a company is a person
What is meant by ‘individual’ in law?
Natural persons only
What is meant by ‘person’ in law?
Natural person or a legal person (companies, LLPs)
One way in which a company is a legal person differs to natural person in law?
Cannot be convicted of offence for which the only punishment is imprisonment, such as murder
Can companies enter into contracts with persons within it?
Yes
For what reason is a company’s residence relevant?
Tax liabilities
How is a company’s residence determined?
By where is ‘really keeps house and does business’ as ‘where the central management and control actually abides’
Case which shows significance of corporate personality
Salomon v A Salomon & Co Ltd
Brief description of Salomon v A Salomon & Co Ltd
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
3 points of significance of Salomon v A Salomon & Co Ltd
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
What is meant by ‘lifting’ or ‘piercing’ the corporate veil?
Disregarding a company’s corporate personality - imposing liability on directors, members or other relevant persons
Three ways in which corporate personality can be disregarded
By statute
By common law
By contract
3 prohibitions/limitations on company names
- 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)
2 examples of ways corporate personality can be taken away by statute (statutory provisions)
- 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
2 examples of ways corporate personality can be taken away by common law
- 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
Petrodel Resources Ltd v Prest - when did the Court say was the only instance in which the courts could ‘pierce the veil’? (‘evasion principle’)
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’
Evasion principle broken down - 3 criteria
- Must be an exiting legal obligation, liability or restriction placed on X
- X must interpose a company in order to frustrate the obligation, liability or restriction
- 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
What is the Duty of Care in relation to corp personality?
Duty of Care care can be imposed on a parent (such as if employee of subsidiary sustains injuries)
4 conditions required for Duty of Care to apply (parent responsible for H&S of subsidiary)
- 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
Example of circumventing corp personality via contract
Director or member guaranteeing a loan made to a company
4 methods used to impose liability on a company
- Personal liability
- Strict liability
- Vicarious liability
- Attribution
