Incorporation & Corporate Personality

Question 1

What is a promoter? What duty do they have and the consequences of a breach?

Answer 1

A promoter = someone involved in business operations familiar to the commercial world by which a company is brought into existence - unless involved by virtue of their professional duties e.g. solicitors or accountants

Have a fiduciary duty = can’t make a secret profit
Unless they disclose to independent persons the nature of the transaction and profit made

Breach = transaction becomes voidable at the company’s instance and promoter may account to the company for profit gained

Question 2

What is a pre-incorporation contract? How is s.51 different from common law? When does s.51 not apply? When are promoters not liable? Can promoter enforce a pre-incorporation contract?

Answer 2

= a contract made by promoter on behalf of an unformed company
Companies have no contractual capacity until the company exists

Under common law, whether the promoter was bound by a pre-incorporation contract depended on the intention of the parties as evidenced in the contract

S.51 CA2006 changes this = a promoter who enters a pre-incorporation contract with a 3rd party will be bound by the contract and is personally liable (unless agreed otherwise)
= 3rd parties can enforce the contract

Doesn’t apply where:

1. A promoter makes a contract before buying an off the shelf company which exists at the time the contract is made
2. The company once existed but has since been dissolved

Promoter not liable if ‘agreed otherwise’ = the agreement must be explicit and the parties must have intended to exclude s.51

Braymist Ltd v Wise Finance Co Ltd [2002] = promoters can enforce the pre-incorporation contract

Question 3

Upon incorporation what can the company not do? (2)
What are the 2 ways a company becomes bound by the pre-incorporation contract?
When may novation be inferred?

Answer 3

Company cannot adopt or ratify a pre-incorporation contract.

1. A term in the pre-incorporation contract states that upon incorporation the promoter is no longer liable if the company contracts with the 3rd party to the same terms
2. Novation = following incorporation, it’s agreed to discharge the pre-incorporation contract and a new contract will be entered into between the company and 3rd party

Novation will not occur because a company acts on the pre-incorporation contract as if it were bound.
Novation may be inferred based on the conduct of the parties, e.g. if company and 3rd party agree to modify the terms.

Question 4

What are the 3 ways to incorporate an unregistered company? Does the CA2006 apply to these companies?

Answer 4

1. By Royal Charter
2. By Act of Parliament
3. By delegation of authority

CA2006 doesn’t apply to unregistered companies
s.1043 CA2006 = The Secretary of State can pass regulations to extend CA2006 provisions to cover unregistered companies

Question 5

What 3 documents must be delivered to CH to incorporate a registered company?

Answer 5

S.9(1) CA2006 = to incorporate a company must deliver 3 documents to CH:

1. Memorandum of association
   Persons wishing to incorporate a company must subscribe their names to the memorandum
   s.112(1) CA2006 = then become the company’s first members upon incorporation
   Memorandum must state that the subscribers:
2. wish to form a company under CA2006
3. Agree to become members of the company
4. To take at least 1 share each if company has share capital
5. The application for registration and accompanying documents (Form IN01):
6. The statement of compliance
   • = states that the CA2006 registration requirements have been complied with

Question 6

What are the 9 things the application to incorporate a registered company must include?

Answer 6

S.9(2) CA2006 = application must include:

1. Public or private
2. Unlimited or limited - shares or guarantee
3. Name
4. Registered office
5. Statement of capital and initial shareholdings (or statement of guarantee)
6. Proposed officers
7. Statement of significant control
8. Copy of Articles of Association (unless adopting the model articles)
9. Company type and intended business activities

Question 7

What are the 7 rules for the proposed name of the company?

Answer 7

1. s.58 CA2006 = public limited company = plc
2. S.59 CA2006 = private limited company = ltd
3. S.66 CA2006 = prohibited from using the same name as an existing company listed on the CH index
   S.67 CA2006 = the Secretary of State can order the company to change the name if they deem it the same or too similar
4. S.216 IA1986 = prohibited name is:
   
   1. A name a liquidating company was known by during previous 12 months or;
   2. A name which is similar and suggests an association with that company
5. S.53 CA2006 = name mustn’t be registered if the Secretary of State deem the name offensive or use of the name would constitute an offence
6. Mustn’t contain words or phrases that are protected by a trademark or would infringe the intellectual property rights of others
7. S.54 and 55 CA2006 = Secretary of State must grant permission if name suggests connection with a governmental body or contains sensitive words/expressions such as ‘British’ or ‘NHS’
   • Approval for word ‘insurance’ = FCA

Question 8

How is a registered company registered? (2 steps)
What will the registrar do? (3)
What 3 things happen from the date of registration?
What does a public company also require? When will this be issued?

Answer 8

1. Submit documents to Registrar of Companies in country the RO is based who will approve if completed properly and company purpose is not unlawful
2. Pay registration fee

s.15 CA2006 = the registrar will register the documents, allocate the company a registration number, and issue a certificate of incorporation
Certificate = conclusive evidence of compliance with CA2006 registration requirements

From the date of registration:

1. company has separate legal personality
2. Subscribers become members
3. directors and secretaries appointed as officers

Public companies must apply for a trading certificate
Doing business without = criminal offence
CH will issue only if company satisfies the minimal capital requirements
Plc may be wound up if no trading certificate after a year of incorporation

Question 9

What is an off the shelf company? What is an advantage? What is a disadvantage?

Answer 9

= purchasing an existing company
Incorporation agents’ specialise in creating and selling companies so register a company and leave it dormant until purchased
When bought, the agent will transfer the company to the purchaser and notify CH of the relevant changes

Advantage = can obtain a company quickly and inexpensively, no length registration

Disadvantage = may not meet the exact needs of the purchaser

Question 10

What is the difference between a certificate of incorporation and a trading certificate?

Answer 10

Certificate of incorporation = issued to company upon incorporation

Trading certificate = issued to public companies only
Cannot commence any business or exercise borrowing powers until it has one
Only issued if CH is satisfied the additional plc registration requirements have been complied with e.g. minimum share capital
Minimum share capital = £50,000 or the prescribed euro equivalent

Question 11

What is the difference between a person and an individual?

Answer 11

‘person’ = natural person or legal person (body corporate) e.g. companies and LLPs

‘individual’ = natural persons only

Question 12

What are the 7 consequences of corporate personality:

Answer 12

1. Has a nationality, domicile, and residence
2. Has contractual capacity
3. Has perpetual succession
4. Can own assets
5. Has its own business separate to directors/members
6. Can commence and defend legal proceedings
7. Gains ‘Human Rights’

Question 13

Describe the case of SALOMON V A SALOMON & CO LTD 1897

Answer 13

• Salomon formed a limited company to take over his boot-making business.
• He, his wife, and their 5 children took 1 share each.
• The company paid £39,000 to Salomon for the business including £10,000 in debentures secured by a floating charge over the assets, making Salomon a secured creditor
• The business later went into liquidation and Salomon was paid first over the unsecured creditors, who then went unpaid.
• The liquidator stated that Salomon should be personally liable for the company’s debts and the High court agreed holding that Salomon was the Company’s agent
• Court of Appeal agreed Salomon was liable on the grounds that the company was not formed in accordance with the Companies Act - the other members were not genuine active members
However, the House of Lords disagreed, and Salomon was not liable

Question 14

What 3 things did the courts recognise in Salomon v Salomon?

Answer 14

1. A validly incorporated company can legitimately be used to shield its members from the liability for the company’s debts.
2. A ‘one-person company’ is valid i.e., a company can be run by one person with serval dormant nominee shareholders.
3. An agency relationship or trusteeship is not established simply because someone holds shares in a company

Question 15

When will the courts lift the corporate veil? What are the 3 methods?

Answer 15

Courts will disregard corporate personality where:

1. Statute provides it is to be disregarded
2. A person is under an existing legal obligation, liability, or restriction , which they deliberately evade or frustrate by interposing a company under their control and all other remedies are no assistance

Methods:
1. By statute
2. By common law
3. By contract - Where a member or director contractually agrees to be liable for the company’s debts or liabilities
○ i.e. creditors lending money to a smaller business

Question 16

What are 5 examples of when statute will lift the veil?

Answer 16

1. s.767 CA2006 = Where a public company does business without a trading certificate
2. s.993 CA2006 = Where a person has engaged in fraudulent trading
3. s.214 and 246ZB = Where a person has engaged in wrongful trading
4. s.399 and 404 CA2006 = Where a parent company fails to prepare consolidated accounts for the group (s.399 and 404 CA2006)
5. s.238 IA1986 = Where a person enters into a transaction at an undervalue

Question 17

What are 4 examples when common law will lift the veil?

Answer 17

1. When company is a sham, perpetrating fraud, or evading some form of legal obligation (Guildford Motor Co Ltd v Horne [1933])
2. When there is a relationship of agency and the principal (parent) is liable for the acts of their agent (subsidiary) (Smith, Stone and Knight Ltd v Birmingham Corporation [1939])
3. When there is a duty of care owed (Chandler v Cape Industries plc [2012]) = Courts didn’t lift the veil but the parent company had assumed responsibility of subsidiary so did have to pay damages
4. Where the evasion principle applies

Question 18

Explain the case of Petrodel Resources Ltd v Prest 2013

Answer 18

• Ms Prest appealed to the court for relief following her divorce from Mr Prest
• His assets were tied up in companies that he solely controlled so the High Court lifted the veil and exercised s.24 of the Matrimonial Causes Act 1973 ordering him to pay £17.5 million to Ms Prest
• He appealed and the Court of Appeal stated the veil should not be lifted in this way
• Ms Prest appealed and the Supreme Court refused to lift the veil
○ Lord Sumption: only 1 instance where veil is lifted = where a person is under an existing legal obligation, liability, or restriction, which they deliberately evade or frustrate by interposing a company under their control
○ = the evasion principle = courts lift the veil
○ Anything else = concealment principle = courts look behind veil not lift

Question 19

What are the 3 conditions that must be satisfied for the evasion principle to apply?

Answer 19

1. There must be an existing legal obligation, liability, or restriction placed upon person (X)
   ○ Yukong Line Ltd Case [1998] = obligation placed upon company X worked for and not X himself = veil wasn’t lifted
   ○ Gilford Motor Co Ltd v Horne [1933] = Horne had a personal obligation to not solicit any of Guildford Motor’s clients = veil lifted
2. X must interpose a company to evade or frustrate the obligation, liability, or restriction
   ○ Gilford Motor Co Ltd v Horne [1933] = Horne’s wife set up a competing company
3. The company being interposed by X must be under X’s control
   ○ Gilford Motor Co Ltd v Horne 1933 = Horne wasn’t a member of the competing company but controlled it through wife

Question 20

What are the 4 forms of liability?

Answer 20

1. Personal liability
2. Strict liability
3. Vicarious liability
4. Liability imposed via attribution

Question 21

What are the 2 types of civil personal liability? When will a director be liable for the 2nd type? Can personal liability occur in criminal cases?

Answer 21

Civil Liability:
1. Contractually liable
• Company can be liable for breach of contract
• Agency law = company usually contractually liable for the acts of those who act on its behalf
○ Agents aren’t liable on the contracts between the company and 3rd parties, the company is

2. Tortious Liability
   • A company is vicariously liable for acts of its director, employees, and agents
   • C Evans & Sons Ltd v Spritebrand Ltd [1985] = a director who commits a tort when acting for the company will not be liable unless:
   
   1. He engaged in the tort in a personal capacity; and
   2. He had satisfied the requirements of the tort

Criminal Liability:
• Statute will identify who can be convicted of the offence in question
• In company law offences usually both company and persons who caused the company to commit the offence can be convicted
• S.1(1) Corporate Manslaughter and Corporate Homicide Act 2007 = company guilty of corporate manslaughter if its activities cause a person’s death, and amounts to a gross breach of a duty of care owed to the deceased

Question 22

Does strict liability occur in civil and criminal cases? What needs to be established for strict liability to occur?
What is an example?

Answer 22

• Occurs in civil and criminal cases
• Company has no mind and mental state i.e. can’t act with malice or recklessly
• All that needs to be established is that the prohibited act or omission was engaged in
• e.g. s.248 CA2006 = requires all board minutes must be recorded and failure = every person in default commits an offence

Question 23

What is vicarious liability in civil cases? What 3 conditions must be satisfied to impose vicarious liability for a civil wrong? Can vicarious liability be imposed in criminal cases?

Answer 23

Civil Liability:
• Involves a situation where one person is liable for the acts or omissions of another person e.g. Director or employee acting on behalf of the company commits a tortious act and company is vicariously liable

To impose vicarious liability for civil wrong, 3 requirements must be satisfied:

1. There must be an employer/employee relationship or relationship of agency
2. The employee or agent must have committed a tort
3. The tort must have been committed in the course of employee’s employment or agent’s agency

Criminal Liability:
• Vicarious liability can be imposed if a statute provides that a company can be liable for the criminal acts of others

Question 24

What is identification theory? How is a company’s directing mind and will determined?
What about in civil cases?

Answer 24

• Identification theory = the state of mind or knowledge of certain persons (e.g. directors) can be attributed to the company

• A company’s directing mind and will = determined by the company’s constitution
• If articles vest managerial powers to the directors, they will constitute a company’s directing mind and will = their state of mind/knowledge can be attributed to the company
• Meridian Global Funds Management Asia Ltd v Securities Commission [1995] = the person who, with the authority of the company, acquired the relevant interest is the person whose knowledge is attributed
  
  • Accepted approach in civil cases
  • For criminal cases, courts first apply the directing mind and will test