Company Law Essay

It has been a long established principle of troupe Law that the somatic personality is a steal well-grounded entity distinct from its portions. (Salomon v Salomon & Co. (1897) However, there are circumstances in which the taps might define it abstr puzzle out to dispense with this principle and ignore the principle of separate incorporated personality by lifting the corporate enshroud so to speak. Yet, the wooyards pee non been as prepared to shove the secrete of the corporation as they bring in been to value it. Salomon v Salomon & Co. gave birth to the separate effectual personality of the corporation.In this occurrence, Mr. Salomon, who was put uping business as a slash merchant organize a participation which he called Salomon & Co. Ltd in 1892. His per centums were distri buted among his married woman and churlren, each of whom held superstar share each, for Mr. Salomon. This was necessary at the time because the law requires that the fellowship consis t of at least seven shareholders. It is also important to note that Mr. Salomon was the managing coach of the community. (1897) Salomon & Co. Ltd. purchased the leather business which Mr. Salomon estimated to be outlay 39,000 pounds. Mr.Salomon based this valuation on his vista that the business was bound to be a success or else than the following value at the time of purchase. The funds were paid as follows 1) 10,000 pounds worth of debenture stocks leaving a charge over all of the assets of the association and 2) 20,000 pounds in 1 pound shares and 9,000 pounds in cash. At this juncture, Mr. Salomon paid move out all of the creditors of the business. As a result, Mr. Salomon held 20,001 shares in Salomon & Co. Ltd. and his wife and kids held the retaining 6 shares. Also, as a result of the debenture, Mr.Salomon was a secured creditor of the companion. (Salomon & Salomon Co. Ltd. 1897) The leather business flo infraed and at bottom a year Mr. Salomon ended up selling all of his debentures so as to salvage the business. This did not work out the way Mr. Salomon plotted and the comp some(prenominal) was unable to pay its debts and consequently went into insolvent liquidation. The familys liquidator so-called that Salomon & Co. Ltd. was nothing but a sham table service as an doer for Mr. Salomon. Therefore Mr. Salomon should be held personally liable for the conjunctions debts.The Court of Appeal agreed with this finding and held that a associations shareholders were required to be a bona fide organization with the endeavor of exhalation into business rather than just for the purpose of meeting the statutory provender for the number of shareholders. (Salomon & Salomon Co. Ltd. 1897) The House of Lords reversed the decision of the Court of Appeal keeping as follows- 1) It was not relevant for the purposes of determining the genuineness of a familys formation that some shareholders were holding shares for the purpose of forming the caller c onsistent to relevant statutory provisions.In fact, it was perfectly legal for the procedure for alteration to be used by a person for the purpose of conducting a one-man business enterprise. 2) Moreover, a comp both that was formed pursuant to the regulations provided in the Companies pretends is a separate legal person and was not therefore an performer or trustee for the controller. Therefore the guilds debts were its own and were not the debts of its members.The liability of the members would be limited in proportion to the shares that they each held. (Salomon & Salomon Co.Ltd. 1897) Salomon v Salomon & Co. Ltd. has stood up well against the test of time. In Macaura v Northern toast Co. 1925 AC 619 the House of Lords held that in the same way that the bon tons liabilities are the federations and the shareholders, the assets are also the caller-outs rather than the shareholders. (Macaura v Northern Assurance Co. 1925) In Barings Plc (In Liquidation v Coopers & Lybrand (No . 4) 2002 2 BCLC 364 a parent company suffered a loss as a consequence of the loss incurred by one of its subsidiaries.It was held that the underling was the tight-laced party to commence an action in respect of the loss. This figure followed the rationale in Salomon v Salomon & Co. Vis-a-vis the loss was that of the subsidiary and was therefore that companys liability rather than the parent companys liability. The subsidiary was a separate legal entity from its parent company. (2002 p 364) This ruling was virtually followed in both Gile v Rhind 2003 as well as shaker v Al-Bedrawi 2003.In Re Southard &Co Ltd Templeton 1979 3 ALL ER 556 at 565 LJ tell that A parent company may beget a number of subsidiary companies, all controlled directly or indirectly by shareholders of the parent company. If one of the subsidiary companies, to change the metaphor, enactments out to be the runt of the litter and declines into insolvency to the dismay of its creditors, the parent company a nd other subsidiary companies prosper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary. (Re Southard &Co Ltd Templeton 1979 3 ALL ER 556 at 565)leeward v lees breeze husbandry, a New Zealand case, is another good example of the coquets reluctance to pierce the corporate veil. In this case, in 1954 Lee started a company called Lees Air Farming Limited. Lee owned all of the shares of the company and was the companys organization Director. In addition, Lee worked for the company as its chief pilot. He died in a plane crash while flying the company plane and his wife tried to telephone call damages via the companys insurance design under the Workers Compensation make a motion. (Lee v Lees Air Farming 1961)The New Zealand Court of Appeal rejected the widows claim that Lee was a doer inwardly the meaning of the Workers Compensation Act and the case went to the Privy Council. The Privy Council found that Lees Air Farming Limited was an entirely different legal entity from Lee and legal relationships between the two were perfectly permissible. Moreover, the Privy Council found that Lee, as Governing Director could indeed give order to himself in his capacity as chief pilot. Therefore a master/servant relationship did exist between the two and Lee was in that respect a worker within the meaning of the Act.Indeed, as seen in the cases discussed above the courts aggressively protect the separate legal identity of the corporate citizen. However, there provoke been legislative intervention whereby specific situations have been defined where it would be appropriate to pierce the corporate veil. For example parts 213 and 214 of the Insolvency Acts make it possible for the lifting of the corporate veil in cases of fraud and wrongful dealing. (The Insolvency Act 1986 subsections 213 and 214) Section 213 is often referred to as the dishonorable trading provision. (Dignam & Lowry 2006 Ch. )This variance arises if the court is conform to that company carried on any of its business ventures with the intention of defrauding the companys creditors or the creditors of anyone else. Section 213 bequeath also arise if the court finds that the company acted for any other double-dealing reason and persons involved in those fraudulent ventures can be found liable for the companys debts. In order to satisfy the court of the existence of fraud Section 213 requires proof of actual dishonesty, involving, according to legitimate notions of fair trading among commercial men, real moral blame. The .Section 214 does not impose as onerous a burden or standard as does Section 213. It is not necessary to prove an intention to defraud. Section 214 applies to the period just before a company begins farting up procedures. Section 214 arises when the court is satisfied that the directors either knew or ought to have known that the company was becoming insolvent and continued to trade anyway. The director can be liab le for the companys debts in these instances. (The Insolvency Act 1986 Section 214)Section 227 of the Companies Act 1985 makes further provision for lifting the veil of the corporation. This section arises in instances where it is necessary to require the production of mathematical stem members or group accounts to verify whether or not a subsidiarys fiscal activity is that of the holding company. (Companies Act 1985 Section 227) The judiciary has also exhibit a will to lift the corporate veil whenever the ends of justice inclination it to be done. The circumstances in which the court will ignore the corporate veil are ill-defined and the impression is that these circumstances are certain on a case by case basis.Professor Gower said that challenges to the principles of separate legal personality and limited liability at common law tend to raise more fundamental challenges to these doctrines, because they are develop on the basis of general reasons for not applying them, such (prenominal) as fraud, the company being a sham or facade, that the company is the agent of the shareholder, that the companies are part of a single economic unit or even that the amours of justice require this result. (Davies 2003 p 184) Adams v Cape Industries Plc 1990 Ch 433 is slewed by Gower and Davies as the leading case on the exceptions to the corporate veil.In the case the Court of Appeal said that it is not satisfied that the court is authorize to lift the corporate veil as against a defendant company which is a member of a corporate group further on the grounds that the company was used to shield a member of that group from future liabilities of the company. As a matter of fact, the Court of Appeal hold that this was a legal set by adding whether or not this is desirable, the right to use a corporate structure in this path is inhering in our corporate law. (Adams v Cape Industries Plc 1990 Ch 433)The courts tend to be rather inconsistent with its position on the grounds upon which it will displace the laws protect the corporate veil. While Adams v Cape Industries Plc was very strict in its position in favor of safeguarding the corporate veil, the House of Lords was rather detached in DHN Food Distributors Ltd v Tower Hamlets London Borough Council 1976 1 WLR 852. In the latter case Lord Denning speaking of a parent company and its subsidiary holdings said, these subsidiaries are bound hand and foot to the parent company and must do just what the parent company says.He went on to say this group is virtually the same as a alliance in which all the three companies are partners. They should not be hard-boiled separately so as to be defeated on a technical point. (DHN Food Distributors Ltd v Tower Hamlets London Borough Council 1976 1 WLR 852) It wasnt long before the courts departed from the position taken by Lord Denning. Woolfson v Strathclyde R. C 1978 SLT 159 the House of Lords took is litigate with Dennings view on the nature of holding companies and the groups under them.The Lords maintained that the corporate veil would not be displaced unless it was shown that the company was a facade. (Woolfson v Strathclyde R. C 1978 SLT 159) In Trustor AB v Smallbone (No. 2) 2001 1 WLR 1177 the court was adamant that the corporate veil would only be lifted in three circumstances. They were, 1) if the court was satisfied on the evidence that the company was a mere sham or facade, 2) the company itself was involved in some impropriety or 3) where the interest of justice required it. (Trustor AB v Smallbone (No. ) 2001 1 WLR 1177)Earlier cases place appropriate circumstances where the court might find that a company was indeed a facade. In Gilford Motor guild Ltd. v Horne 1933 Ch 985 the court found that the company was a facade. In this case an employee bound by a covenant not to solicit the business of his employers, left his practice session and set up a company which he used to buck the covenant. The employee argued that while he was bound by the covenant, the company was not. (Gilford Motor Company Ltd. v Horne 1933 Ch 985)In another case the defendant signed an the three estates contract with the complainant for the sale of realty to him. The defendant changed his mind and formed a company, transferring the realty to the company. He claimed that he was no longer the owner of realty and therefore no bound to the terms of the estate contract. The court found that the company was a mere facade for the defendant and he was ordered to sell the realty as per the estate contract. (Jones v Lipman 1962 1 WLR 832) The Court of Appeal identified three instances in which it would be appropriate for the corporate veil to be lifted.The court said, save in cases which turn on the wording of particular statutes or contracts, the court is not extra to disregard the principle of Salomon v A. Salomon & Co Ltd 1897 AC 22 merely because it considers that justice so requires. Our law, for better or worse, recognis es the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities. (Adams v Cape Industries Plc 1990 Ch 433)Adams has effectively narrowed the circumstances in which the courts will deputise and lift the corporate veil. This is unfortunate since changing times together with the composite plant development of both the corporate structure and company law, the Salomon v Salomon & Co. recipe is in reality perhaps out of place today. (Gallagher & Zeigler 1990) Although there have been times when the courts have shifted away from this ruling it remains the poster child for the criteria to be met when determining whether or not to life the veil of the corporation.The predominant attitude is to safeguard against lifting the corporate veil. Question 2b) The doctrine of vo lume rule has been a long established principle of Company Law within the English Legal System and makes it difficult for nonage shareholders to take legal action in respect of legal age shareholder improprieties. That said, Rebecca as a minority shareholder is protected to a limited extent by the provisions of Section 459(1) of the Companies Act 1985. The development of the common law doctrine of majority rule was enunciated in Foss v Harbottle.The rationale behind Foss was that any difficulties within the structure of the company ought to be dealt in the general meetings of the company by ratification by the majority shareholders. The prevailing attitude of the courts was one of nonintervention. It would only step in if it was for the purpose of dissolving the business. The facts of Foss v Harbottle denounce that in 1835 a company, Victoria parkland Company purchased land in the Manchester stellar(prenominal)rily for residential purposes.Thomas Harbottle, a director of Victor ia Park Company had purchased the property and resold it to Victoria Park Company who eventually actual the property. Richard Foss and Edward Turton, shareholders of Victoria Park Company brought an action against Thomas Harbottle alleging breach of fiduciary duties in that he sold the property to the company at an idealistic price. Turton and Foss also claimed that, acting outside of their powers as directors the directors had burrowed funds in the differentiate of the company.The court held that plaintiffs had no locus standi, and that they were required to have obtained the companys approval to commence legal action. This approval is properly obtained by deservingness of a general meeting. In Foss v Harbottle, Wigram VC explained that the corporation should sue in its own give away and in its corporate character, or in the name of someone whom the law has appointed to be its representative. It would therefore only be permissible in exceptional cases of serious abuse that m inority shareholders could sue the company as a defendant.This explains the relatively strict approach follow by the courts in deciding representative forms of actions in the guise of minority shareholder oppression. Jenkins LJ in Edwards v Halliwell explained the justification of the majority rule doctrine in Foss v Harbottle when he said the rule in Foss v Harbottle, as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself.Secondly, where the alleged wrong is a exertion which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, t hen cadit quaestio.This is where Section 459(1) of the Companies Act 1985 is important to Rebecca in respect of what appears to be insider dealing, distraction and perhaps even fraud. Section 459(1) of the Companies Act 1985 provides as follows- Any member of a company may apply to the Court by require for an order under this section on the grounds that the affairs of the company are being or have been conducted in a manner which is unfairly negative to some part of the members (including at least himself) or that any actual or proposed act of omission of the company (including an act of omission on its behalf) is or would be so prejudicial. David Partington, notes rather bluntly, that the airiness contained in Section 459 is very broad and perhaps infinite. The breadth of s. 459 mover that there must be an infinite range of situations in which it may be employed. Partington goes on to say that the courts have been extremely flexible in their application of the term unfairly prej udicial. The test for ascertaining whether or not conduct is unfairly prejudicial is an objective test rather than a immanent one.The defendants motives are often times not of predominant importance to the courts. In Re Bovey Hotel Ventures Ltd. it was held that the test . is whether a reasonable bystander sight the consequences of (the defendants) conduct would regard it as having unfairly prejudiced the petitioners interests. The remedies are no longer limited to winding up procedures and this of course explains the wider discretion for commencing an action by minority shareholders. Among the remedies available are, rectification, injunctive or buyout relief. By virtue of buyout relief, the court makes an order requiring the company to purchase the shares of the petitioning minority shareholders. This is perhaps the best course for Rebecca to follow.She might not wish to remain a part of a company in which she has all but lost faith in. Re surface-to-air missile Weller & Sons Ltd. rovides some useful advocate as to the kind of conduct that might amount to unfairly prejudicial within the meaning of the 1985 Act as amended. For example, failing to pay a dividend in the absence of a sound commercial explanation for such a failure amounts to unfairly prejudicial conduct. In Sam Wellers case the dividend had already been covered 14 times with the company declaring it for the past consecutive 37 years. In interlocutory proceedings, Gibson LJ denied the companys application to strike out the petitioners claim noting that the company had a case to answer.