WS2 - Cases / Statutes / other - Legal personality and limited liability

Question 1

Section 74 Insolvency Act 1986 enshrines…

Answer 1

The concept of limited liability confirming that the shareholders of a limited company are, generally speaking, not liable to a liquidator in the event of the company’s insolvency.

Question 2

Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915]

Answer 2

Haldane LC: ‘a company is an abstraction. It has no mind of its own any more than it has a body of its own…’

Question 3

Benefits of limited liability

Answer 3

1. Allows passive investment
2. Encourages & facilitates entrepreneurship by reducing risk
3. Allows pursuit of higher risk higher reward corporate strategies through use of groups of companies. These groups of companies may dedicate a business division to high-risk strategies as a seperate company within the group without less risky companies being vulnerable to creditors of the riskier companies

Question 4

Macaura v Northern Assurance Co [1925]

This case clearly sets out the concept that…

Answer 4

…a company, as a separate legal entity, may own property on its own behalf.

FACTS:
Macaura (M) was the owner of the Killymoon estate in County Tyrone, Ireland. He sold the whole of the timber on the estate to a company which he set up, in consideration of the allotment to him of 42,000 fully paid £1 shares. M and his nominees owned all the shares in the company, and M was also a creditor of the company in the amount of £19,000. M took out insurance policies in his own name with Northern Assurance Co, covering the timber against fire. Two weeks later a fire destroyed almost all the timber. M brought a claim on the insurance policy.

HELD: The House of Lords held that the timber belonged to the company and not to M, therefore he was unable to claim on the insurance policy, despite owning almost all the shares in the company.

Question 5

Lee v Lee’s Air Farming Ltd [1961] AC 12 (Privy Council)

This case clearly states the principle that…

Answer 5

…a separate legal entity may enter into a contract on its own behalf.

FACTS:
Mr Lee (L) incorporated Lee's Air Farming Ltd in New Zealand in 1954. The nominal capital of the company was £3,000 divided into 3,000 shares of £1 each. L held 2,999 shares and the final share was held by a solicitor (as the New Zealand legislation at the time required companies to have two shareholders). L was also the sole director of the company and was appointed as an employee (the chief pilot) in the company's articles. In 1956 L was killed in a plane crash whilst working, leaving a widow and four infant children. L's widow brought a claim under the Workers' Compensation Act 1922. 

HELD:T he Privy Council found that the company and L were distinct legal entities and therefore L under his contract of employment was a ‘worker’ as defined under the Act. The widow therefore was entitled to compensation and it was irrelevant that L was also the vast majority shareholder and sole director.

Question 6

Adams v Cape Industries plc [1990] Ch 433 (Court of Appeal)

This case confirmed the principle that…

Answer 6

…a company is a separate legal identity, including any divisions of other companies owned by the parent company. Here, the case set out that a claim could not be brought against a parent company of an employee of a company owned by the parent company. The subsidiary company was a separate legal identity to the parent company, notwithstanding ownership.

FACtS:
Cape, an English company, was the parent company of a group of wholly owned subsidiaries, some of which mined asbestos in South Africa and others marketed the asbestos in other countries, including the US. The employees of the Texas subsidiary company NAAC became ill with asbestosis and sued Cape and NAAC in the Texas court. Judgment was entered for breach of duty of care. The issue before the Court of Appeal was whether the judgment could be enforced against the much wealthier parent company, Cape, in the English court, since Cape’s assets were all based in England. NAAC had by that time been closed down by Cape. The requirement for this was either that Cape consented to the Texas jurisdiction (which it did not) or that Cape was ‘present’ in the US in Texas. The claimants argued a) that Cape and its subsidiaries should be treated as a single economic unit, b) that the subsidiaries were used as a façade concealing the true facts and that c) an agency relationship existed between Cape and NAAC.

HELD:
The Court of Appeal rejected all these arguments and held that the judgment could not be enforced against Cape. Note that this case was a leading authority on ‘piercing the corporate veil’ prior to the 2013 case of Prest v Petrodel and you will return to look at it again in this context in the next element.

Question 7

Section 16 CA 2006

This section sets out…

REMEMBER THIS STATUTE PROVISION

Answer 7

that a company becomes a body corporate (so a legal person) capable of exercising the functions of an incorporated company from the date of incorporation (the date on which the Registrar issues the certificate of incorporation). From this date, the company has its own existence and personality.

Question 8

S59 and S60 CA 2006

What does this section of the stated act set out?

Answer 8

Sets out that any limited company must make its creditors aware that the company is limited by ending names with either Ltd or Plc

Question 9

What are two key issues a creditor may face when dealing with a limited liability company?

Answer 9

1. Difficulty in claiming monies due to difficulty in ‘lifting the corporate veil’: Creditors of companies and claimants in court actions risk being unable to receive monies due to them as the concept prevents them from going behind the corporate structure to seek monies from those controlling the company.
2. Outdated financial statements on Companies House: Accounts are only filed once a year so may not represent the current position. Small private companies’ accounts do not give much information.