Case Law - Part 1

Question 1

Duties of a promoter

Answer 1

Erlanger
v
New Sombrero Phosphate Co (1878)

• Promoters occupy fiduciary position in relation to unformed company
• Promoters cannot make a profit out of a companies promotion unless the nature of transaction and profits are disclosed

Question 2

Contractual Capacity

Answer 2

Lee
v
Lee’s Air Farming Ltd (1961)

• A company can enter contracts with persons outside the company and persons within in
• Insurance company to pay out compensation owed to Lee’s widow

Question 3

Pre-Incorporation contracts case law

Answer 3

Phonogram v Lane (1981)

Mr Lane was held personally liable to return funds

• Where a person purports to act on behalf of a company not yet formed
• Unless clear exclusion of personal liability, s.51 should be given its full effect
• Can escape liability if there is an agreement to the contrary

Question 4

Contract of novation

Answer 4

Howard v Patent Ivory Manufacturing Company (1888)

• Method of payment changed from cash (pre-incorp contract) to cash and debentures
• Held to be evidence of a fresh agreement
• Newly formed contract cannot takeover pre-incorporation contract without being able to show change in pre-incorp contract
• Replacing an old obligation with a new one
• All 3 parties must agree (company, promoter and third-party)

Question 5

Pre-incorporation contract between agent and third party

Answer 5

Braymist v Wise Finance Limited (2002)

• Third party (Wise) sought to avoid liability
• Third party (Wise) going to buy land from lawyers of Braymist (agent) not yet formed
• Third party (Wise) failed to get planning permission and attempted to pull out of contract because Braymist was not yet formed
• Held that Braymist could enforce contract and Wise was held liable

Question 6

Name the seminal case and the three reasons it is vital to understanding the significance of corporate personality

Answer 6

Salomon v A Salomon & Co Ltd (1897)

• The HOL recognised that a validly incorporated company could legitimately be used to shield its members from liability
• Implicitly recognised the validity of a ‘one person’ company (company run by one person, with several dominant nominee shareholders)
• Recognised that a relationship of agency or trusteeship is not established because a person holds shares (even if all) in a company

Question 7

When can a corporate personality be disregarded by STATUTE

Answer 7

• CA 2006 s.399 (group accounts)
• CA 2006 s.767 (doing business without a trading certificate)
• CA 2006 s.993 (fraudulent trading)
• IA 1986 ss.213 and 246ZA (fraudulent trading)
• IA 1986 ss.214 and 246ZB (wrongful trading)
• IA 1986 s.238 (transaction at an undervalue)
• IA 1986 s.239 (preferences)

Question 8

Disregarding corporate personality under common law (concealment)

Answer 8

• Prest v Petrodel Resources Ltd (2013)

The 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;
  and
• if other, more conventional, remedies have proved to be of no assistance

Question 9

Disregarding corporate personality under statute (company used as facade or a sham)

Answer 9

Gilford Motor Co Ltd v Horne (1933)

Question 10

Disregarding corporate personality under statute (relationship of agency exists between parent company and subsidiary)

Answer 10

Smith, Stone and Knight Ltd v Birmingham Corporation (1939)

Question 11

Further application of Prest v Petrodel (2013)

Answer 11

Wood v Baker (2015)

Question 12

Duty of care case law

Answer 12

Chandler v Cape Industries plc (2012)

Question 13

Interpretation of articles case law

Answer 13

Rayfield v Hands (1960)

Question 14

Article amendment case law

Answer 14

Allen v Gold Reefs of West Africa Ltd (1900)

• Lindley MR stated the power to alter the articles must ‘be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole’.
• The company here refers to the corporate entity, so if an amendment benefits the members, but not the company, then it will be invalid

Question 15

Article amendment case law that does not affect the company at all but affects its members

Answer 15

Greenhalgh v Arderne Cinemas Ltd (1951)

• Held that the amendment was valid because it might well be in a hypothetical member’s benefit to sell his shares directly to an outsider. Further, the advantage obtained by Mallard was also obtained by all the other shareholders, so the amendment did not discriminate between majority and minority shareholders.

Question 16

Enforcing s.33 contract

A member breaches a term of the constitution, the company can sue the member for breach of contract

Answer 16

Hickman v Kent or Romney Marsh Sheepbreeders’ Association (1915)

• The company’s articles stated that any dispute between it and a member should be referred to arbitration before any legal proceedings were issued.
• The constitution formed a contract between the company and Hickman, and Hickman had breached this contract.
• Accordingly, the court stayed the legal proceedings brought by Hickman
  and allowed the company to enforce the arbitration clause.

Question 17

Enforcing s.33 of contract

A company breaches the terms of the constitution, a member can sue the company for breach of contract

Answer 17

Wood v Odessa Waterworks Co (1889)

• The articles provided that the directors could declare a dividend be paid to the members
• The board proposed an ordinary resolution stating that debenture bonds would be issued to the members, instead of payment of a dividend.
• (Wood) objected and sued the company on the ground that it had breached the articles. Wood’s action succeeded and an injunction was granted preventing the bonds from being issued

Question 18

Enforcing s.33 of contract

A member (or members) of the company breaches a term of the constitution, another member can sue for breach of contract

Answer 18

Rayfield v Hands (1960)

• The articles provided that any member who wished to sell his shares should first offer them to the directors and the directors would then purchase them.
• Directors refused to purchase shares
• The directors had breached the articles and so Rayfield’s action succeeded. The court ordered that the directors should purchase Rayfield’s shares.

Question 19

Outsiders and outsider rights case law

Answer 19

Eley v Positive Government Security Life Assurances Co (1876)

• Eley as a solicitor could not sue for breach because, as an outsider, he was not party to the s.33 contract

Question 20

Members can only enforce the s.33 contract if they bring a claim in their capacity as a member case law

Answer 20

Beattie v E and F Beattie Ltd (1938)

• Company intitiated proceedings
• The dispute was between the company and Mr Beattie in his capacity as a director, not in his capacity as a member.
• Accordingly, the arbitration article could not be enforced and the legal proceedings continued.

Question 21

Apparent authority

Answer 21

Hely-Hutchinson v Brayhead Ltd (1968)

• Claimant (MD of Hely-Hutchinson) Mr Richards sueing Brayhead for money incurred due to losses following indemnification
• Board of Brayhead claimed chairperson acted without authority
• Court held money to be recovered as Brayheads board acquiesced to decisions made by chairman

Question 22

Share expropriation case law deemed invalid

Answer 22

Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd (1920)

Court held article amendment was not bona fide for the benefit of the company and was therefore invalid

Article provisions state shareholder can be forced to sell his shares to specified persons (usually other directors or shareholders)

Question 23

Implied actual authority case law

Answer 23

Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964)

• Legal relationship between the principle and agent created by a consensual agreement
• Two types of actual authority (express actual authority, implied actual authority)

Question 24

Share expropriation case law that was approved

Answer 24

Sidebottom v Kershaw Leese Co

• restrictive provision allowing expropriation
• shareholder competed with company