COMP AS A CORPORATION Flashcards
COMPANY?
an artificial legal person created by law under S 20 & 21
A comp will auto be corporate body/ corporation w the name registered
DEFINITON COMPANY S 20
Co. is separate legal entity,
an artificial legal person created by law,
separate from the persons who took steps to form the company, and it will continue to exist until removed from the Register
EFFECTS OF INCORPORATION
S.21 CA 2016- A company shall be capable of exercising all the functions of a body corporate
This means the co. is a legal “person” that have the
full capacity :
◦ To sue and be sued
◦ To own property/ dispose
◦ To do any act to enter into transactions.
◦ Enjoys Perpetual Succession
S 18 -registered comp = corporate personality, separate legal entity
- SEPARATE LEGAL ENTITY S 20
CASE: Salomon v A. Salomon & Co. Ltd
Background
- Salomon, a sole trader, ran a successful business in boots and shoes.
- In 1892, he formed a company, A. Salomon & Co. Ltd., and sold his business to the company.
- The company had seven shareholders: Salomon (major shareholder), his wife, and his five children (each holding 1 share).
- Payment to Salomon for the business was in the form of 20,000 £1 shares (making him the major shareholder) partly in cash, and debentures
- As a debenture holder, Salomon became a secured creditor of the company.
Issue
- When the company failed and had to be wound up, other creditors claimed that Salomon and the company were effectively the same, that the sale of the business was a sham, and that his family members were merely his nominees.
Court’s Decision
- The court held that upon incorporation, the company and Salomon became two separate legal entities.
- The company was legally capable of giving debentures to Salomon, recognizing him as a secured creditor.
This case established the principle of the separate legal entity of a corporation, meaning the company and its shareholders are distinct entities.
CASE: Lee v Lee’s Air Farming Ltd
Background
- Lee formed a company, Lee’s Air Farming Ltd., owning all but one share.
- He was the sole director and the chief and only pilot employed by the company.
- Lee died in an accident while flying for the company.
Issue
- Lee’s wife claimed Workmen’s Compensation under New Zealand legislation.
- The key question was whether Lee was a worker employed by the company or the controller of the company.
Court’s Decision
- held that Mrs. Lee was entitled to compensation.
- Even though Lee controlled the company, the company was a separate legal entity that could employ him.
This case reinforced the principle that a company is a separate legal entity from its shareholders and controllers, capable of entering into employment contracts with them.
- COMP CAN SUED & BE SUED IN ITS OWN NAME
The company’s members generally cannot represent the company or take any legal action on its behalf.
Only the company itself can enforce its rights.
* This is called the ‘proper plaintiff’ rule
CASE: Foss v Harbottle
Background
- Two shareholders sued the company’s directors for misusing company property.
Issue
- Whether the shareholders could take legal action for the company’s injury.
Court’s Decision
- The court held that since the injury was to the company, only the company had the right to sue, not individual shareholders.
This case established the “proper plaintiff” rule, meaning that only the company can sue for wrongs done to it.
- TO OWN PROPERTY/ DISPOSE
The property belongs to the
company, and the member has no right or interest in it
CASE: Macaura v Northern Assurance Co. Ltd
Background
- Macaura sold timber to his company.
Issue
- Whether Macaura could claim insurance on the timber after selling it to the company.
Court’s Decision
- held that Macaura had no right to claim insurance.
- Once he sold the timber, it became the company’s property, and Macaura no longer had an insurable interest in it.
This case highlights that company property belongs to the company, not to individual shareholders.
- ENJOYS PERPETUAL SUCCESSION
S 20(b)
It will continue to live until it is properly wound up/ remove by register.
Even if all the member dies, the business still exists
CASE: Re Noel Tedman Pty Holdings Ltd
Background
- The company’s only shareholders and directors were a husband and wife.
- Both died in a traffic accident.
Issue
- Whether the company continued to exist after their deaths.
Court’s Decision
- The company continued to exist despite the deaths of its only shareholders and directors.
This case illustrates the principle of perpetual succession, where a company’s existence is not affected by the death of its shareholders or directors.
VEIL OF INCORPORATION S 16(5)
a legal concept that is drawn to separate the company from its members (personalities of its shareholders) &
protects the shareholders from being personally liable for the company’s debts and other obligations
Once a company is incorporated, it has its own legal personality. The court typically will not look behind this separate identity or pierce the ‘corporate veil’ to investigate who is behind the company or the reasons for its establishment.
EXCEPTIONS CORPORATE VEIL where courts PIERCES / LIFTS THE VEIL
- STATUTORY EXCEPTIONS
- JUDICIAL EXCEPTIONS
When the court lifts the corporate veil or pierce the corporate veil, the actual people who run the company or officers will be made liable for the company’s obligations
- STATUTORY EXCEPTIONS
INCOME TAX ACT 1967
in the case of tax, the corporate veil is consistently lifted in the case taxation.
IRB may ignore transactions
made by the co, where it is found incidences of alterations/ evasions to
avoid any liability to tax.
These transactions often conceal the true nature of the company’s affairs
S. 30(2) CA 2016
A company is registered name so
registration number must appear on the transactions that issued by the co.
If the name of the co does not
appear on such document, the liability is
imposed on the person who signs,
issues / authorizes the documents
S. 123(4)
give financial assistance to purchase any shares in the company
If someone is convicted of an offense under this section and the Court finds that the company or another person suffered loss or damage because of it, the Court may order the convicted person to pay compensation to the affected company or person.
S. 131(1)
If dividends are paid without available profits, the directors who declared them will be liable to the company’s creditors if the company can’t pay its debts during liquidation. They are liable for the amount by which the dividends exceeded the available profits.
S. 540 (1)
In cases of fraudulent trading, if a company is formed or run for fraudulent purposes, anyone knowingly involved will be personally liable for the company’s debts if it goes into liquidation.
- JUDICIAL EXCEPTIONS
- Comp is formed to evade legal duty
/ as a vehicle fraud.
CASE: Gilford Motors Co. v Horne
Background
- Horne, the Managing Director, agreed not to take customers from Gilford Motors after leaving.
- He left and formed his own company, JM Horne Co., to take customers.
Issue
- Whether Horne’s new company breached the agreement.
Court’s Decision
- The court granted an injunction against Horne.
- Horne used the new company as a vehicle for wrongdoing.
This case demonstrates that a company cannot be used to evade legal duties or commit fraud.
- To attribute mental state or physical character to comp
CASE: Tesco Supermarkets Ltd. v Nattrass
Background
- A company has no physical or mental existence; it acts through human agents.
Issue
- How to attribute a mental state or intent to a company.
Court’s Decision
- To determine if the company had a guilty mind, the court looked at the “mind and will” of those controlling the company.
- The court considered whether the controlling person intended to commit the crime.
- “Mere employees” were not seen as the “directing mind and will” of the company.
This case clarifies that the mental state of a company is attributed to the intentions of its controlling individuals, not its employees.
- When a company acts as an agent or alter ego for its controllers, it has the capacity to act on their behalf. Courts have sometimes interpreted an implied or express agency relationship between the company and its members, making the members liable for the company’s actions.
CASE: Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd (1988)
Supreme Court decided to lift the corporate veil. The majority shareholder owned nearly all the company’s shares and was considered the company’s alter ego. The court took into account the interests of the creditors, in this case, the banks, when deciding to lift the veil of incorporation.
- When a company is used as a front to hide true intentions/facts
CASE :Re Bugle Press Ltd
2 shareholders who held 90% of the company’s shares wanted to buy out the third shareholder.
After he refused their offer, they formed a new company to exploit a legal provision allowing a company with 90% of shares to buy the remaining 10%. The court ruled that they formed the new company to hide their true intention to buy out the third shareholder.
