Company Law in the UK - Essay Example

?Company Law Table of Contents Introduction 3 U.K Company Law and Corporate Veil 4 Sta y Exceptional 6 The Current of Law and Exceptional Cases 9 Critical Analysis 13 Conclusion 15 15 References 16 Bibliography 21 Introduction The UK company law entails the regulations developed by the government of the country under the Companies Act 2006, to deal with the corporate operations of the country. It has been enforced with the intention to govern the operations of the corporate houses of the country and instructs them to operate with the best interest of all the stakeholders involved with them1. As per the Company Law, it is commonly admitted that company is a separate legal entity which advocates that the members of the company are distinct from the corporate body. However, under certain circumstances, it has been identified that courts may disregard this principle. Correspondingly, corporate veil is a legal notion that separates the characteristics of a business from that of the characteristics of its shareholders, which further defends the shareholder from becoming liable for the debts and other legal obligations associated with the company. It simply signifies that the creditors of the company cannot claim personal assets of the owner; instead, they could claim only for the assets related to the entity2. In this regard, lifting the corporate veil is another legal notion of the company law enacted in the UK which is intended to signify that there is no distinction between the rights and duties of a corporate body and its members. In this context, it has been noted that, lifting the corporate veil will no longer make the owner or investors of the company to enjoy the benefits or protection as per the law related to the corporate body. Simultaneously, the notion of lifting the corporate veil will also make shareholders of the company liable for any probable debts and liability owned by the corporate body3. Based on this context, the paper will highlight the various aspects related with the company law of the UK and the reluctance of the UK courts to lift the corporate veil, except in the most exceptional cases. U.K Company Law and Corporate Veil The UK company law comprises specific standards and regulations regarding the corporate operations in the UK. One of the prime intentions of the law is to set regulations regarding the claims of the corporate body. It has been noted that there are various approaches, which companies adopt in order to conduct their business; out of which, certain approaches might not be in favour of the stakeholders of the company. In order to limit those approaches, the government of the country are often engaged in developing the company laws. The laws mainly intend to ensure proper conduct of the companies, which are both legal as well as ethical at the same time. The companies in the UK are primarily governed under the Company Act 2006, which was recently amended in the year 2009. The updated or revised presentation of the UK company law is further observed to be quite simple as well as more flexible, which further facilitates in easy understanding of the rules and regulations by the corporate members. The revised edition of the law aims at enhancing the liabilities of the shareholders towards its various business operations4 5. Lifting the Corporate veil is one of the sections or contents of the UK company law that falls under the Companies Act 2006. It is fundamentally referred to the decision of the law, which signifies that any claim or the liability of the corporate body is separable to the members of the corporate entity. Accordingly, when a creditor of the company discovers that a debtor or the company is insolvent, the creditor of the company usually seeks to recover the debt from the members of the company including directors, shareholders and at times, with the associate of the company. In such scenario, when assets of the company are insufficient to meet the claims of creditors, the court may make the members of the company liable to meet these claims. It is worth mentioning in this regard that the court may not pass such orders or the verdicts except in certain exceptional cases. In the UK, there are few exceptional cases, where the court had ordered to lift corporate veil, such as in the cases of Jones v Lipman, Gilford Motor Co Ltd v Horne and Wallersteiner v Moir among others6 7 8. Statutory Exceptional There are particular statutory exceptions, where directors or the other members of the company can be made liable for the claims or the debts owed to the creditors of the company9. Some of the exceptional circumstances, where court can issue order to lift the corporate veil are discussed below: Failure to Obtain a Trading Certificate When a corporate body fails to acquire a trading certificate along with a certificate of incorporation prior to the commencement of trading, members of the company are made liable to the creditors or the other parties for the loss or the damage incurred due to the failure of the company10. Failure to Use Company Name According to the section 349(4) of the Company Act 1985, if any person of the company or acting on behalf of the company signs any instrument like bill of exchange or cheque in which, the name of the corporation is not stated or mentioned, then the person is held liable to pay any amount to the holder of the instrument11. Disqualified Directors The section 15 of the Company Directors Act 1986 advocates that if an individual, who has been disqualified to act as the director of the company, continues to render the task of director in contravention, in such circumstances, the individual will be liable to pay the entire claim for the loss incurred while acting as a director12. Wrongful Trading The section 214 of the Company Act 1986 deals with the issue of wrongful trading and the involvement of members of the company is such conducts. This section allows the court to pass order to lift the corporate veil, when the company has become insolvent due to the any wrongful trading. Accordingly, the court makes the director, officially assigned during the insolvency of the company, as liable for the loss owed to the creditors of the company. In such circumstances, the director is held liable to contribute towards the settlement of claims from his/her personal assets13. Fraudulent Trading The section 213 of the Insolvency Act 1986 under the Companies Law in the UK, relates with fraudulent business operations. This section advocates that the court can issue orders against any individual member of the company, if the business of the company performs with the sole intention of deceiving creditors of that corporate entity. Under this section, if any individual is found to be knowingly involved in the activities that ultimately lead towards the generation of claims against the company, the court can declare orders in favour of the creditors to obtain claims from the defaulting member of the company, thus lifting the corporate veil14. Phoenix Companies The Insolvency Act under the UK Companies Law also enables the court to remove the corporate veil in certain cases associated with or termed as Phoenix Companies. It is worth mentioning that Phoenix companies deals mainly with the creation of a new company with the identical name to the insolvent corporate. Notably, under the section 216 of this Act, such practices are considered as an offence, wherein the director of the insolvent company can be sued before the law. In such circumstance, the director is liable for any claims made by the creditors of the company15. Unfair Prejudice Under Section 459 of the Company Act 1985, directors may be deemed as liable for the claims made by the shareholders, if it is ascertained that the director of the company has been engaged in unfair activities or has made partiality with certain group of shareholders16. The Current State of Law and Exceptional Cases It has been identified that currently, the UK courts have deciphered strong reluctance to lift the corporate veil. In other words, it has been argued that the veil will not be lifted just because it renders justice to the plaintiff. In the case of Adams v Cape, the court ordered that the group of the companies may be considered as a single entity or the unit under certain circumstances only, where there lay specific conditions or any contractual provision that permits to consider the group of the companies as a single entity17. These amendments can be comprehensibly justified with reference to few exceptional cases. In the case, Jones v Lipman [1962] 1 WLR 83218, Mr. Lipman was supposed to sell a house to Mr. Jones. However, Mr. Lipman, after a certain point of time, transferred the property to a company which was owned and controlled by him. The court, under the judgement-ship of Russell J., depicted that Mr. Lipman had completely violated the contract along with the fraud he had conducted as an owner of the company. The court found both the parties (Mr. Lipman and the Company) guilty and delivered the judgement accordingly19 20 21. Another exceptional case that has seen the UK court decision for the lifting of cooperate veil is the case of Gilford Motor Co Ltd v Horne [1933] Ch 93522. According to the case, Mr. EB Horne was a managing director of the company, Gilford Motor Co Ltd. His employment agreement with the company precisely mentioned that he could not disclose the information of the company in order to attract the customers under any circumstances. However, after a point of time, it has been noted that Mr. Horne was fired from his post of being a managing director of the company, after which, he set up his own business. The information he could acquire as an employee of Gilford Motor Co Ltd was further utilised by him in order to undercut the price of the product offered by Gilford Motor Co Ltd and attract customers to his personal business. Consequently, against this approach of Horne, Gilford Motor Co Ltd sent him a legal notice on the grounds of breach of contract. In order to deal with this, Horne set up a company and named it JM Horne & Co Ltd where his wife and one of his friends were the sole shareholders and directors. The company did not make any agreement with Gilford Motor Co Ltd and thus, JM Horne & Co Ltd was not bound to the contract entered by Mr. Horne with Gilford Motor Co Ltd. Later, Gilford Motor Co Ltd sued the company depicting that the company developed by Mr. Horne was used as an instrument to cover his unlawful actions23 24 25 26. Judge Lord Hanworth declared the judgement in favour of Gilford Motor Co Ltd and stated that it JM Horne & Co Ltd was formed as an instrument and as a trick, in order to disguise the effect of the illegitimate approach of Mr. Horne against Gilford Motor Co Ltd. Hence, the court issued orders stating a ban on JM Horne & Co Ltd 27 28 29. In the case of Wallersteiner v Moir [1974] 1 WLR 99130, Mr. Wallersteiner had acquired a company named Hartley Baird Ltd, and began utilising the money of the company for personal benefits which further involved the infringement of the financial assistance law under section 54 and 190 of the UK Companies Act 1948. By this approach, Mr. Wallersteiner became 80% owner of the company, while Mr. Moir was allocated with 20% shares of the company. Mr. Wallersteiner, was charged against the infringement law under the section 54 and 190 of the Companies Act 1948. In this regard, the court declared the judgement wherein Mr. Wallersteiner was charged as guilty for using the company’s assets for personal benefits. Contextually, the court made Mr. Wallersteiner liable for the repayment of those funds back to the company; hence, lifting the corporate veil31 32. Again in another exceptional case, Creasey v Breachwood Motors Ltd [1993] BCLC 48033, Mr. Creasey was fired from his post as the general manager of the company named Breachwood Welwyn Ltd. He asserts that this approach of the company directly involved a breach of his contract of employment with the company. On the other hand, before Mr. Creasey could have made a claim, the company stopped its trading and moved all its assets to its other sub-company named Breachwood Motors Ltd. It has been further noted that the debts owed to creditors of the company were duly settled, but the company and was found to be reluctant towards satisfying the claim of Mr Creasey's. Contextually, no amount was held in reserve by the company towards meeting the claims of Mr. Creasey. Since the company had no assets to meet the claims of its creditors, the court ordered both the directors of the company to pay ?53,835 to Mr. Creasey. Mr Richard Southwell alleged that since the directors of both the companies were the same, they had intentionally mistreated the separate legal personality of the companies by relocating the assets of the company without following their responsibility as shareholders and directors34 35. Critical Analysis As mentioned above, there were only few specific instances where the UK company law enforced the decision of lifting the corporate veil. Thus, it can be argued that corporate veil needs to be lifted in order to render justice and protect the creditors of the company from the fraudulent act of the members of the company. As can be observed from the case of Jones v Lipman [1962] 1 WLR 832, the decision of lifting the corporate veil was enforced owing to certain distinctive reasons. It has been noted that both Mr. Lipman as well as the company developed by him, had been involved in fake activities with Jones. It is clear that Mr. Lipman was deceitful to Mr. Jones, which further was deemed to be measurable under the provision of lifting corporate veil, as he was directly involved in fraud. Hence, owing to the approach of Mr. Lipman, the UK court decision of lifting corporate veil can be justified. This approach of court, under the UK company law, has also been noted in another significant case of Gilford Motor Co Ltd v Horne [1933] Ch 935. In this particular case, Mr. Horne was observed to have violated the contract of his employment contract with his former employer, i.e. Gilford Motor Co Ltd, where he had accepted their condition of not to solicit the customers even after leaving the company. However, after being fired from the company, Mr. Horne formed his own business and utilised the information he had acquired during his tenure as an employee in Gilford Motor Co Ltd, to solicit the customers into his business. In this case, the ultimate decision of the court was made on the ground that Mr. Horne had developed his company against the contract between him and Gilford Motor Co Ltd, which eventually contributed towards the infringement of the law of contract on the part of Mr. Horne36. Furthermore, as per the law related to lifting corporate veil, violation of contract can also be seen as criteria to impose the decision of lifting corporate veil. This case directly relates to the decisions and the grounds depicted in the case of Jones v Lipman [1962] 1 WLR 832. However, the reluctance of the UK courts regarding lifting corporate veil can also be depicted from certain cases. In this regard the case example of Adams v Cape Industries plc [1990] Ch 433 would be vital to discuss. The case revealed that Cape Industries plc, which was among the renowned companies of the UK, was involved with mining of asbestos in South Africa. The company, owing to its worldwide operations, complained against the jurisdiction of the US. The company filed a case at Federal District Court in Texas regarding its operational charges. It has been further noted that the company did not take any part in the proceedings of the USA Court and as a result, default judgments were delivered by the court. The court decided that both the company in the US and the parent company in the UK will be considered as one Single Company and the corporate veil must be lifted accordingly. However, the UK court stated that corporate veil cannot be lifted only to achieve justice. There are certain criteria that are in need for that. Likewise, the UK court depicted that neither Cape Plc had a fixed place for business in the US nor it had carried on business in US for a considerable period of time. The court portrayed that these two criteria could be used, on the basis of which, the UK court might enforce the decision of the US jurisdiction. Furthermore, as per the UK company law, the court illustrated that Cape plc was not involved in any approach that can be considered to make its shareholder liable to enforce a decision of lifting the corporate veil. In this regard, Chandler v Cape plc [2012] EWCA Civ 525 postulated a similar decision as per the UK Company law. Hence, in this regard, the reluctance of the UK court under the company law of the UK towards not lifting the corporate veil can be justified37 38 39. Conclusion From a critical point of view, it can be ascertained that the company is a separate legal entity and its members are distinct from the company. In this regard, lifting of the corporate veil reveals that all the members of the company are equally liable for the any claim or the debts owed by the company. It has been further observed in this regard that such decisions are quite likely to have a strong impact on both the shareholders as well as the owners of companies, which would make them liable to the face the adverse effects of corporate veil. However, the UK court has been quite reluctant to lift the corporate veil unless an extreme need or exceptional cases are witnessed. Owing to this aspect, there are only few exceptional cases where corporate veil is lifted by the UK court with extremely justifiable reasons. The reluctance of the court in order to avoid lifting corporate veil could be seen in cases such as Adams v Cape Industries plc [1990] Ch 433 and Chandler v Cape plc [2012] EWCA Civ 525 among the prime. References Arthurs Clare, ‘To Pierce or Not To Pierce? The Court of Appeal Protects the Corporate Veil’ [2012] (The Commercial Litigation Journal) accessed 22 July 2011. AWE, ‘Company Law’ [2011] (Home) accessed 22 July 2011. Birks Peter and Pretto Arianna, Breach of Trust. 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