Company Law and Company Registration - Essay Example

? Topic (Company Law) A company acquires its legal personality after registration under the companies Act. Through incorporation, a company becomes a legal entity separate and distinct from its members who are the shareholders. Registration of a company involves delivery of memorandum of association, article of association, declaration by promoters of their intention of being formed into a company and list of directors to the registrar of companies as entailed in the companies Act. The company registration constitutes it “a body corporate.” It becomes a “legal person” or “corpora corporata.” In Salomon’s case, Lord Halsberury stated that “once the company is incorporated it must be treated like any other independent person with rights and liabilities appropriate to itself”. This means that the company as independent person has rights and obligations which are not the same as the rights and obligations of its member. This the fundamental attribute of corporate personality. Incorporation has both economical and social consequences on a company after being registered. For instance, the company has a perpetual life existence as its life does not depend on the life of its members. The company’s membership changes in a definite order prescribed by the company’s article and subject to changes indefinite period of time until the company’s liquidation. The membership is transferable from one member to another as long as the entity is a going concern. Corporate corporata also means that the member’s liabilities are limited by shares or liability. The liability of members is either limited to the amount that has remained unpaid, if any, on the shares held by then or to the amount the members have undertaken to contribute on the assets of the company incase its wound up or liquidated. This means that the debts of the company are not the debts of the shareholders as illustrated by the facts of and decision in Salomon v Salomon & co. ltd in which it was held that Salomon as a member was not under an obligation to pay the company’s debts. Thus the company’s creditors cannot institute legal proceedings against a member in order to recover the amount owed to them by the company. The member does not become his debtor merely because the company is his debtor, as in the case of unincorporated entities. A registered company has also the legal capacity to sue and be sued in its own name, which act as its seal. That is the company is the proper plaintiff and neither the directors nor shareholders can sue on its behalf to redress a wrong done to the company. This is illustrated by the facts of and the decision in, Foss v Harbottle. A limited company has also the capacity and the ability to buy, own or sale property in its own name, thus the company’s property does not belong to the members as per the case of Macaura v Northern Assurance Company. Thus, if the directors or the shareholders take the company’s money to purchase personal effect or discharge personal liability will be liable to the company for conversion. This is explained in the case of A L Underwood Ltd v Bank of Liverpool. The directors only hold the money in trust on behalf of the company due to fiduciary relationship. Thus incorporation renders a company a distinct and separate legal entity unlike unincorporated entities such as sole proprietorship or partnership. This principle is what is referred to as, in common parlance, as corporate shield or veil of incorporation between the company and its members. Unveiling the corporate veil is the identification of the company with its members to hold individual members liable to their own acts for assistance of the authority or court to compel corporate legal entity to look unto real beneficial owners. The court may lift and/ or unveil where its essential to secure justice where deemed necessary but the rule of separate legal entity still remains the general principal except in exceptional cases. There are some instances under statutory provision or case law where the courts have interfered with or modified the legal rule of incorporation which has come to be known in common law as lifting the veil or piercing the veil of incorporation. For instance, in modifying the principal in Solomon’s case, it is necessary to consider that both control by the wrongdoers and impropriety, which is misuse of the company by them, as a device or facade to conceal their wrongdoing as in the case of Ben Hashem v Ali Shayif. The court may lift the veil to effective remedy to deal with the wrong which has been done and where the interposition of the company would deprive that remedy against and for the purposes of the relevant transaction. As the vice chancellor said in Trustor, “the court is entitled to pierce the corporate veil and recognize the receipt of the company as that of the individual(s) in control of it if the company was used as a device or facade to conceal the true facts thereby avoiding or concealing any liability of those individual(s)”. The motive of the wrongdoer maybe highly relevant as per the court of appeal pointed out in cape. Ownership and control of accompany are not sufficient evidence to enable the court lift the veil, as per the principle in Salomon v Salomon & co Ltd. Waren J. states that “control may be a necessary but not a sufficient condition to pierce the corporate veil.” It is quite certain that company law does not recognize any exception to the separate entity principle simple on sole ownership and control” as stated by justice Munby’s decision. Thus, since the company is a legal entity it operates as distinct and separate legal person different from its individual owner/members. The ownership and control of the company is separated in order to enhance good corporate governance. The directors are the managers of the company on behalf of its shareholders. Since the company is an artificial person, it activities are carried out by the directors who acts as it signatories to authenticate all the contracts made by the company. They hold the company in trust due to fiduciary relationship. However, the veil may be lifted if those in control form the company mainly to defeat the plaintiff’s rights to specific performance. As in the case of Jones v Lipman, where Lipman had conveyed to a company land which he had already contracted to sale to the plaintiff in order to defeat the plaintiff’s claim for specific performance. Thus, the case succeeded. The court may also lift the corporate shield only if there is some “impropriety”. Mis (use) of company assets by its directors or those in control for personal gain are not allowed. Thus, the judgment in Adams v cape industries plc was reversed by the Court of Appeal, essentially on the ground that "impropriety", an essential requirement if the veil is to be pierced, was not even alleged. Hobhouse L.J. said: “Nothing improper was done by the group or the companies in the group or their directors … Indeed, before us Mr. Ashe has frankly accepted that he does not put his case in that way. He says no impropriety is alleged. He does not allege that there was any breach of the provisions of the 1986 Act, or that there was any conduct on the part of the directors (or any other person) in 1992 or 1995 which would give rise to remedies under the Companies Act 1985 or under the 1986 Act. Therefore, he is not able to rely upon any concept of fault or indeed of fraud in support of his contention that the corporate veil should be pierced. It will be appreciated that this immediately puts the facts of this case into a completely different category from cases such as Wallersteiner v Moir. Furthermore, he is not able to make out any case that at any stage the company was a mere facade, or that it concealed neither the true facts, nor that there was any sham. All the transactions that took place were overt transactions. They were conducted in accordance with the liberties that are conferred upon corporate entities by the Companies Act 1985 and they do not conceal anything from anybody. The companies were operating at material times as trading companies and they were not being interposed as shams or for some ulterior motive." The veil of incorporation may not be lifted merely because the company is involved in some impropriety. The misuse should be as a result of the use of company structure to avoid or conceal liability. This is illustrated in the case of Trustor in which Sir Andrew Morritt VC stated that “companies are often involved in improprieties. Indeed there was some suggestion to that effect in Salomon v Salomon & co ltd. But it would make undue inroads into the principle of Salomon’s case if an impropriety not linked to the use of the company’s structure to avoid or conceal liability for that impropriety was enough.” However, the court will not lift the veil of incorporation merely because the corporate structure has been used so as to ensure that the legal liability ( if any ) in respect of the particular future activity of the defendant company will fall on another company which is a member of corporate group as was held in Adams v Cape industries plc. This is because cape in law was entitled to organize the group’s affairs in the manner that it did and hence the principle of corporate personality prevailed. The court will only lift the veil if it is necessary to provide a remedy for the third parties for the wrong in which those in control of the company have done to them and not just because “ justice requires .“ The court may lift the veil to effective remedy to deal with the wrong which has been done and where the interposition of the company would deprive that remedy against and for the purposes of the relevant transaction. As in the case of Gilford Motor co. v Horne in which the ex-employee of the company would not be liable for the company’s electricity bills merely because he was using the company to avoid a covenant binding on him personally and the same goes for the vendor of the property in Jones v Lipman as a dictor by Munby j. in his judgment. In Munby judgment he stated: “It is not permissible to lift the veil simply because the company has been involved in wrong doing, in particular simply because it is in breach of contract. And whilst it is clear that the veil can be lifted where the company is a sham or facade or to use different language, where it is a mask to conceal the true facts, it is only correct to do so only in order to provide remedy for the wrong which those controlling the company have done.” Lord Hanworth held that the company was formed in order to mask the effective carrying of the business by Mr. Horne, the purpose being to enable him to carry on the business in the breach of a covenant he had entered into in the case of Gilford motor co. v Horne. Hence the veil was lifted for that matter and the case succeeded. In Trustor, the courts also lifted the veil. In this case, Smallbone had transferred to Introcom substantial sums belonging to the claimant which he had removed in breach of his duty as managing director of the claimant. Rimer J had found that Smallbone controlled Introcom that the directors were nominees acting on his instructions, that the company had no independent business, third party directors, creditors or shareholders, that he was its directing mind and will and that "Introcom was simply a vehicle Mr. Smallbone used for receiving money from Trustor." The Vice Chancellor held that the court was entitled to pierce the corporate veil and to regard the receipt by Introcom of the monies as receipt by Smallbone. He said: "these conclusions are such as to entitle the court to recognize the receipt of the money of Trustor by Introcom as the receipt by Mr. Smallbone too. Introcom was a device or facade in that it was used as the vehicle for the receipt of the money of Trustor. Its use was improper as it was the means by which Mr. Smallbone committed unauthorised and inexcusable breaches of his duty as a director of Trustor." There are also other instances in case law where the corporate shield may be pierced. For instance in case of agency relationship, the company will liable by for its acts. However it is a question of fact in each case where the company is acting as an agent for its members and/or shareholders where their may be express/conduct agreement. In the case of Urban District Council v South Wales Traffic Area Licensing Authority Lord Cohen stated that: “Under the ordinary rules of law, a parent company and a subsidiary company, even 100% subsidiary company, are distinct legal entities, and in the absence of an agency contract between the two companies, one cannot be said to be the agent of the other. That seems to me to be clearly established by Salomon v Salomon co ltd.” If the court holds that a subsidiary company was acting as an authorized agent of its holding company, the veil will be lifted. This is illustrated by the decision in Firestone Tyre and rubber co v Llewellin in which it held, on the basis of trading arrangement between the holding company and its subsidiary, that the subsidiary was the agent of the holding company. However the veil will not be lifted merely because justice requires or to treat a group of companies as a single economic unit in the case of tort victims. This was illustrated in the case of Lubbe v Cape plc where Lord Bingham held that the question of proving a duty of care being owed between a parent company and tort victims of a subsidiary would be answered merely according to standard principles of negligence law and generally whether harm was reasonably foreseeable. The veil of incorporation may also be lifted in order to circumvent a fraudulent or improper design by a bunch of scheming promoters or shareholders. This is illustrated by the decision in Jones and Another v Lipman and another and Gilford motor Co ltd v Horne. The court’s order in the latter case is usually cited as an instance of lifting the veil but it should be noted that the defendant (Horne ) was not a member of the company and in principle, no veil existed between him and the company which would have been lifted by the court. It is rather an instance of the court regarding the company as Mr. Horne in another form (“alter ego”) The veil of incorporation may also be lifted if a company is regarded as an enemy character. A company may be regarded as an enemy character if, inter alia, all or substantially all of its shares are held by alien enemies. This is illustrated by the facts of and the decision in Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd. In this case Lord Parker stated in his judgment that a company registered in the United Kingdom, but carrying in business in neutral country through agents properly authorized and resident here or in neutral country, is prima facie to be regarded as a friend, but may, through its agents or person(s) in de facto control of its affairs, assume an enemy character. The courts may also find it necessary to lift the veil of incorporation in cases relating to informal ratification by the members of acts done on behalf of the company. The courts will regard the decision of the members as the decision of the company itself and thereby lifted the veil of incorporation. This is illustrated by the facts of and the decision in Re: Express Engineering Works Ltd. In this case Warrington L. J. stated: “as directors they could not but as shareholders acting together they could have made the agreement in question. It was competent to them to waive all formalities as regards notice of meetings, etc., and to resolve themselves into a meeting of shareholders and unanimously pass the resolution in question. In as much as they could not in one capacity effectively do what was required but could do it in another, it is to be assumed that as businessmen they would act in the capacity in which they had power to act.” The courts may also lift the veil of incorporation in group enterprises to regard a subsidiary and its holding company as one entity. There is no basic principle governing the lifting of the veil in these instances and each decision was based on the facts of the particular case. This is illustrated by the facts of and the decision in Harold Holdsworth & Co Ltd v Caddies, Hellenic and General Trust Ltd & DNH Food Distributors v London Borough of Tower Hamlets. In Harold case the house of lord held that there had been no breach of contract. Lord Reid stated: “it was argued that the subsidiary companies were separate legal entities each under the control of its own board of directors, that in law the board of the appellant company could not assign any duties to anyone in relation to the management of the subsidiary companies and that therefore the agreement cannot be construed as entitling them to assign any such duties to the respondent. My Lords in my judgment, this is too technical an argument. This is an agreement re mercatoria and it must be construed in light of the facts and realities of the situation.” In conclusion the proposition surrounding the disturbance of corporate personality is still dominated by the decision of the court of appeal in Adams v Cape Industries plc. This general principle has maintained the corporate principle in piercing the corporate shield. Citation US corporate law Lubbe v Cape Plc [2000] 1 WLR 1545 Berkey v. Third Avenue Railway 244 N.Y. 602, 155 N.E. 914 (1927) Texas Business Corporation Act of 1997, art 2.21(2) Bouchoux, Deborah E.. Business organizations for paralegals. 4th ed. New York: Aspen Publishers, 2007. Judge, Stephen. Company law. 2nd ed. Oxford [UK: Oxford University Press, 2010. Woolfson v Strathclyde Regional Council 1978 SC (HL) 90 at page 96: Adams v Cape Industries PLC [1990] Ch 433 at page 539 Motor Company Limited v Horne [1933] 1 Ch 935 at page 956 Jones v Lipman [1962] 1 WLR 832 Read More