#19673 - 1. Companies Corporate Personality, Formation And “Piercing The Corporate Veil - Company Law

SECTION 2

LECTURE HANDOUTS

TOPIC 1:

CORPORATE PERSONALITY, FORMATION AND ‘PIERCING THE CORPORATE VEIL’

Essential Reading:

Dignam & Lowry, Chs 1 – 3; Ch 4, paras 4.14 – 4.21 (on pre-incorp. contracts)

Additional Reading:

• Davies, Introduction to Company Law (OUP, 2020), Chapter 1

• Kraakman et al, The Anatomy of Corporate Law (3^rd Ed, 2017, OUP) Chapter 1

• Worthingon, Chs 1-3.

• Hannigan, Chs 1 and 3.

1. Legal forms for running businesses.

• Sole traders

• Partnerships,

• Companies

Insolvency Act 1986, S 74:

1. When a company is wound up, every present and past member is liable to contribute to its assets to any amount sufficient for payment of its debts and liabilities, and the expenses of the winding up, and for the adjustment of the rights of the contributories among themselves. This will put individuals off, individuals don’t want to be liable.

(2) (d) in the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member;

The companies we shall focus on are ‘registered companies’ ie created by ‘registration’ under the Companies Act 2006 (or one of its predecessors). There are some other types of company, such as ‘chartered companies’ and ‘statutory companies’. We won’t be addressing those.

Moreover, there are different types of registered company: public limited companies (‘PLCs’); private limited companies (‘Ltd’); limited by shares; limited by ‘guarantee’; unlimited. Try to get a sense of the main differences between these types, and why the vast majority are ‘private companies limited by shares’. Most companies are limited by shares; banks are unlikely to loan money to limited by guarantee.

2. Forming a company

Understand, from Dignam and Lowry, the basic process for ‘registering’ (ie. creating) a company under the Companies Act 2006.

• The various bits of paperwork that are required (details of directors, shareholders, ‘registered office’, constitution, and so on, are sent to the Registrar of Companies at Companies House (in Cardiff). Have a look at the Government’s website for details of the different ways of doing this, which determine the speed and costs of incorporation:

https://www.gov.uk/topic/company-registration-filing/starting-company

• Essential point: in UK, registration is quick, and cheap. Why?

• It’s tempting to think that all the rules governing companies are found in the law. But often, company law leaves it to companies themselves to fix their own rules – especially regarding the ‘internal running’ of the company, such as which people (eg shareholders, or directors) take which decisions, how they hold meetings; etc.

• Companies put these rules in their constitutions – formally called ‘articles of association’. Those forming a company must either draft their own articles or, if they prefer an easier life, can adopt one of the standard versions that the Government has produced. These are known as the ‘Model Articles’ (with different versions for private, and for public, companies). The current versions apply, by default, for companies incorporated from 1/10/2009 onwards. The proceedings of the board are regulated by the articles of association which will contain detailed rules covering matters such as:

• Decision making by the Directors

• The calling of directors’ meetings

• Quorum requirements

• Minutes must be kept of all board meetings

They are in your statute books – they’re the penultimate statutory instrument.

• Once registration process is completed, and the company has been created, a ‘Certificate of Registration is issued (CA 2006 – s.15(4)). This is the company’s birth certificate. It proves the precise date the company came into existence, and its unique number.

• Finally, understand what is meant by a pre-incorporation contract and, crucially, who can be held liable, and who can enforce, such a contract.

CA 2006, s.51

A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.

• Phonogram v Lane [1982] QB 938

• Braymist Ltd v Wise Finance Co Ltd. [2002] BCLC 415

3. Corporate Personality

The company is a legal “person”; the shareholder is a separate “person”. Humanity is not necessary for legal personality; the extension of the ‘separation of humanity’ from legal personality means that humans who are engaged in a common activity can attempt to simplify their joint activity by gaining legal personality for the venture.

(a) Consequences:

• The company owns the property it acquires (the shareholders don’t own that property):

• Macaura v Northern Assurance [1925] AC 619

• Macaura exchanged his own timber for the shares of the company and assigns it to the company. Later he takes an insurance to secure the timber in his personal name. The timber remains on his personal land (not owned by company). Fire burned the timber, and he attempts to claim insurance. However, the timber does not belong to him, and the insurance company can only pay the owner of the timber. Can’t claim what you don’t own!

• Perpetual succession – the company (legally – although not always practically) survives the death/retirement etc of its human shareholders/directors.

• The company itself will be liable for contracts made on its behalf. This greatly facilitates the limited liability of its shareholders/directors.

The logical follow-on from the creation of a separate legal personality is that it is just that, a separate legal personality capable potentially of suing and being sued in its own name, of holding property in its own name, and logically, therefore, of making profits and losses that are its own and not those of its members (shareholders). separating the members from the company’s corporate identity.

Separate legal personality and limited liability are not the same thing—limited liability is the logical consequence of the existence of a separate personality

A company can have legal personality without limited liability if the statute confers it in that way (this is still possible today by forming a registered unlimited company (CA 2006, s 3(4))).

Limited liability was provided from the Limited Liability Act 1855 –

• This meant: whenever anyone deals with a limited company in the UK they are met with the warning; ‘Ltd’ in the case of a private company or ‘PLC’ for a public company attached to the company’s name to signify that the members of this company have limited liability. In other words, they are not liable for the debts of the company.

• ‘Ltd’ or ‘PLC’ refers only to the members’ liability and not that of the company.

• The company itself is liable for its debts but once its assets are exhausted the creditors cannot go after the members’ assets.

As a result, company law emerged as an important and distinct area of law. Companies are not human, they need to act through humans and so accommodations had to be made to agency principles, fiduciary and statutory obligations, and rights.

(b) Extending these benefits to ‘one person’ companies

• Salomon v A. Salomon [1897] AC 22 to do with the logic of limited liability

• Fundamental to the legal personality of the company. Salomon started as a sole trader and changed his business into a company—he had 2 businesses (one sole trader and the other newly registered company)

• CA 1862 – 7 people required to form a company, so Salomon put his family on the register (1 share each for 5 children and his wife). He became the majority shareholder and managing director.

• Legal issue – whether he should be personally liable to pay off debts to unsecured creditors.

• Before the change in legal status the customers and suppliers contracted with Mr Salomon the sole trader, who was liable for all the debts of the company. After incorporation and the sale of the business to Salomon and Co Ltd the customers and suppliers contracted with the company through its managing director, Mr Salomon (same face, different personality).

  • Almost nothing noticeably changed besides the Ltd sign

• Mr Salomon’s personal liability for the debts of the business had changed completely from unlimited liability as a sole trader to limited liability as a shareholder in the company. Not only was Mr Salomon not liable for the debts of the company but as managing director of the company he had also granted himself a secured charge over all the company’s assets. Additionally, he paid 10,000 worth of debentures which secured the company’s assets (he had become a secured creditor) Thus, if the company failed not only would Mr Salomon have no liability for the debts of the company but whatever assets were left would be claimed by him in satisfaction of his debt.

• Almost immediately after the change in the legal status of the business the company had trading difficulties and Mr Salomon had to sell his debenture to raise money for the business. Salomon and Co Ltd the debenture holder enforced the security over the assets of the company and the company was placed into insolvent liquidation.

• Held – corporate veil not pierced – Salomon not liable.

  • The Court of Appeal held in favour of the claimant and in doing so they looked at the motives of the promoters (Mr Salomon) and the members (Mr Salomon and his family) of the company. The focus of the Court of Appeal’s concern was that the six family members never intended to take a part in the business and...