Nature of a company and its formation Case Law Flashcards
Separate Legal Personality Case Law
Salomon v Salomon & Co Ltd (1897)
This established Case Law for separate legal personality
Must Know this case. Always refer back to this one.
Case: Salomon owned a boot business which he sold to a company which he had formed, called Salomon & Co Ltd. There were seven members in the business: his wife, daughter and four sons who took one share each and Solomon himself who took 20,000 shares. The price paid by the company to Solomon was £30,000 but instead of giving him cash, the business gave him 20,000 fully paid £1 shares and £10,000 in secured debentures (i.e. he lent the company £10,000). The company was wound up. The assets of the business amounted to £6,000 out of which £10,000 was owed to Solomon and £7,000 to unsecured creditors. The unsecured creditors claimed that Salomon and Salomon & Co Ltd. were really the same person, he could not owe money to himself and they should be paid their £7,000 first.
Held: Salomon was entitled to the £6,000 and the unsecured creditors got nothing. The company was to be regarded as a completely separate person in the eyes of the law from its members and its officers.
Separate Legal Personality Case Law
MacAura v Northern Assurance Co Ltd (1925)
Case: r MacAura owned a forest. When he incorporated his business he transferred the ownership of the forest to the Co. MacAura had insured the forest against possible damage or loss, but when the company became its owner MacAura failed to transfer responsibility for insuring the property to the company. The forest later burned down and he tried to enforce the insurance policy. The insurance company argued that MacAura was no longer the owner of the forest and he did not have an insurable interest. MacAura sues insurance company for proceeds.
Held: MacAura had transferred ownership of the forest to the company. The company should have insured the forest, not Mr MacAura. Therefore neither he, nor the Company could claim the proceeds. MacAura and the company were completely separate persons in the eyes of the law.
Separate Legal Personality
Lee v Lee’s Air Farming Ltd (1961)
Case: Mr Lee was majority shareholder, sole director and chief pilot in his own company. He was killed in a work-related air accident and his widow claimed compensation. The company’s insurers refused to pay compensation as they claimed he could not be an employee of the company. Given that he owned so much of the company, this would amount to him making a contract with himself.
Held: Mrs Lee was entitled to compensation. Mr Lee and the company were to be regarded as completely separate people in the eyes of the law. One person (Lee) an employee of another person (the company) had been killed in the course of his employment.
Lifting the veil of incorporation Case Law
Public Interest
Daimler Co Ltd v Continental Tyre & Rubber Co (GB) Ltd (1916)
Case: A company was registered and had its registered office in England. All of its members with control of the company (except one) were German.
Held: The veil could be lifted to expose the company as an enemy alien. Therefore trading with this company was against the law (in wartime).
Lifting the veil of incorporation
Evasion of Obligation
Gilford Motor Co Ltd v Horne (1933)
Case: An employee was contractually bound not to solicit customers from his ex-employer after leaving its service. In order to get round this, he formed a company and carried on his work, soliciting his ex-employer’s customers in the process.
Held: The veil was lifted to reveal his company as a “mere cloak or sham” and an injunction was granted against it and the employee. (to prevent an evasion of obligations)
Company Formation
Pre-Incorporated Contracts
Phonogram Ltd v Lane (1982)
Other cases Include (referring to non-existing companies)
Kelner v Baxter (1866)
Tinnevelly Sugary Refining Co v Mirrless, Watson & Yaryan Co Ltd (1894)
Case Law: Lane proposed to form a company, FM Ltd, to run a pop group. Lane entered into a contract with Phonogram Ltd “for and on behalf of FM Ltd”. However, FM Ltd was never actually incorporated. Phonogram Ltd claimed the return of their money from Lane personally.
Held: It was held that Lane was personally liable for the money advanced to FM Ltd by Phonogram Ltd. The Court of Appeal held that the fact the Lane had signed “for and on behalf of FM” made no difference to his personal liability.
Company Formation
Pre-Incorporated Contracts
Phonogram Ltd v Lane (1982)
Other cases Include (referring to non-existing companies)
Kelner v Baxter (1866)
Tinnevelly Sugary Refining Co v Mirrless, Watson & Yaryan Co Ltd (1894)
