A Critical Appraisal of the Decisions of European Court of Justice - Case Study Example

Undertaking a critical appraisal of the decisions of the ECJ, consider the extent to which the ECJ has consistently adopted this view. One of the most important principles of the European Union (EU) is to establish a common market amongst member States as it enables EU to compete globally with other giant economies, such as that of US. A single market can be achieved only by allowing freedom of movement of people, services and goods. In this essay we will start by critically analysing Article 48 of the Treaty of Amsterdam, former article 58 of the Treaty of Rome, then we will analyse the 'real seat' theory and the 'incorporation' theory to consider whether there is any contradiction to the freedom of establishment. Following that we will look at relevant case law to see where ECJ standing is in this issue. Article 48 states: "'Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States.' The treaty clearly states that a legal person, such as a company or firm, must be treated in the same way as a natural person, therefore a company must be able to move between member states without any restrictions. Saying that, it should be pointed out that the case of a company is more complicated, as unlike a natural person a company can stand at two different places simultaneously. Matters complicate even further when we consider that a company should be formed in accordance with the law of a Member State. Across Europe recognition of companies differs from Member State to Member State. Broadly speaking Member States take two approaches at recognising a company as having a valid legal personality. Most of them follow the real seat theory, others follow the incorporation theory. A country which follows the incorporation theory, such as United Kingdom, recognises a company as a legal personality providing it is incorporated in any of the Member States. The incorporation theory gives companies the freedom of choosing the law applicable to them. Meanwhile the real seat theory requires a company to be subject to the law of the country where its effective centre of administration is located. Supporters of this theory say that "a dominant proportion of the promoters, directors, officers, share holders, and debt-security holders of a corporation is more likely to be concentrated in the country where the genuine head office is located than in any other single country." Therefore it is necessary for the company to be subject under the law of the country where its main place of business is, in order to protect costumers, creditors and shareholders of that company. For example, if a company is incorporated in England, but the company's headquarters or central administration is in Germany, which follows the real seat theory, than France, another country which follows the real seat theory, would recognise this company as subject to German law. As this company is not incorporated in Germany hence is not recognised as a legal personality by German law, then nor would France recognise it as a legal personality. This situation might happen when the growth of a company's branch drives it to become the principal place of business. In such case the company would have to be liquidated and reincorporated, something directors would want to avoid. Such obstacles surly prevent and make it not an easy option for a company to move within European member states, so how has this theory managed to survive while faced with Act 43 and 48 of the EC Treaty on the principle of freedom of establishment. The treaty gives three connecting factors between a company and a member state namely: "registered office, central administration or principal place of business" to take account of different systems of company law within Europe. Furthermore article 239 states that Member States should enter in negotiations with each other in order to achieve mutual recognition of companies, as far as it is necessary. Such negotiations have not been undertaken, therefore the obstacles to the free movements of companies still remain. Case law has to some extent clarified ECJ's position on these issues, and has left many others unresolved. The first case concerning the treaty provision on the freedom of establishment was that of Commission v France1. The commission brought proceedings against France on the bases that French law discriminated between the French companies and those companies which had a branch or agency in France but were established in another Member State. The commission claimed that French law was contrary to Art 48 as it treated companies with their seat in another Member State and French companies differently, moreover the bases for the distinction was their seat and as their seat defines the nationality of a company this was discrimination on the bases of nationality. The commission claimed that foreign companies where disadvantage by this difference in treatment therefore it acted as a restriction to the freedom of movement within the community. The French Government tried to argue that the difference in treatment was based on distinction between 'residents' and 'non-residents' which was found and accepted in all legal systems, it also tried to justify the distinction on the bases that agencies may enjoy advantages compared to companies. The ECJ rejected both of the arguments and all other arguments put forward by the French government and it emphasised that it is the obligation of national legislation to follow the principle of establishment as stated under Act 48 and 43 of the EC treaty and restriction or discrimination on base of nationality is a breach of the principle of freedom of movement as companies or firms should be free to establish themselves in any member states, in the legal form that they choose and be treated as a natural person. Commission v France was the first case which showed the effect and importance of Article 43 and 48 of the EC Treat in action. Another case which deals with the principle of freedom of movement is known as the Daily Mail2. The Daily Mail, an investment bank incorporated under English law, wanted to transfer its central management to Netherland for the purpose of circumventing English tax law. The United Kingdom objected and argued that the Daily Mail should at least sell some of its asset in order to fulfil tax requirements under UK law before moving its central place of business. The Daily Mail argued that it was against principle of freedom of establishment to prevent it from moving to another Member State. The case was referred to the ECJ which ruled that UK tax law did not affect Daily Mail's freedom of establishment as it only limited it from transferring its central management while keeping its legal personality as a UK company. Some might have concluded that the reason for this decision was for the purpose of protecting Member States from circumvention of their law as expressed in the opinion of Advocate General to the Court: "As a general rule it appears that the national court may assess whether, in a specific case and having regard to the circumstances, there is a suggestion of abuse of a right or circumvention of the law and whether it should decide not to apply Community law." The ECJ never stated explicitly that a Member State can refuse to apply EC law when there was and intention to circumvent national law, nor did it give a principle against circumvention. Thus it appears that a member State can effectively prevent a company from moving its central administration to another Member State without breaching article 48 of the EC Treaty, therefore without restricting a company's freedom of establishment as stated: "It should be borne in mind that, unlike natural persons, companies are creatures of law and, in the present state of Community law, creatures of national law." A case which takes the principle of establishment further is that of Centros3. In Centros a Danish couple incorporated a company in England in order to circumvent the Danish minimum capital requirements. The company never traded in England, nonetheless it tried to establish a branch in Denmark. Denmark refused to register Centros on the bases that it was not trying to establish a branch but a 'principal establishment' as it never traded in UK. Centros argued that the establishment was a branch and that under the rights of establishment of Art.48 it should be allowed to register as a UK company setting up a branch in Denmark, the fact that it never traded in UK does not affect its freedom of establishment. The ECJ held that it was indeed contrary to the principle of freedom of establishment stated under Act 43 and 48 of the EC treaty to not allow the company to register. Denmark argued that the refusal to register Centros was justified as the minimum requirements of capital were in order to protect creditors. The ECJ rejected the argument on the bases that the requirements should not be discriminatory, and such policies cannot justify denial of legal capacity as it restricted freedom of establishment. However the court stated that Denmark could take measures to combat fraud or to intervene if the company was trying to avoid obligations towards public or private creditors in Denmark. Another argument put forward by the Danish government was that the case of Daily mail permits legislation to resolve issues of freedom of establishment. The ECJ distinguished between Daily Mail and Centros stating that the Daily Mail was concerned with the transfer of the centre of administration to another Member State, not with a company whose seat of administration was transferred. The ECJ restated that companies are creatures of law therefore they have to fulfil their obligation under the law subject to them, but this dose not extent to another State preventing a company form setting up a branch. Centros established the general rules of the freedom of establishment of companies, the Daily mail was confined to the acts of the state of incorporation. Centros case has stirred much debate amongst law scholars and many found it surprising. In the Daily Mail case the decision was in favour of the Member State protecting its national law, meanwhile in Centros the decision was held in favour of the company circumventing national law. After the Daily Mail case most thought that the circumvention of national law was incompatible with the freedom of establishment, but the ECJ's ruling in Centros made it clear that that is not the case. Another important area that the above case touches upon is that of the real seat theory. Many scholars after the ruling of Centros thought that the real seat theory was incompatible with the freedom of establishment. Even though this case was between two countries which follow the incorporation theory, many thought that the ruling signified an end to the real seat theory. Nonetheless, The ECJ avoided stating explicitly that the real seat theory is incompatible with the EC Treaty. Maybe because The ECJ thought that this was a matter for legislation to consider and decide. Another case which deals with the real seat theory is that of Uberseering4. Briefly, Uberseering was a company incorporated in Netherland. It contracted a German company to do some work on its property. The German company left its work unfinished and it was of very poor standard. Uberseering sued the company, but as it was not recognised as a legal personality, the action was dismissed. Later on, the matter was referred to ECJ which held that denying legal capacity to Uberseering was against the principle of freedom of establishment. This was seen as another blow to the real seat theory, but its supporters say that the real seat theory is still compatible, as it is only affected when it comes to recognising the ability to legal standing. The jurisdiction or the legislation, have not managed to harmonise the connecting factors for the national companies within Europe. Neither Centros nor Uberseering have directly addressed the consistency or inconsistency of the real seat theory with the principle of freedom of establishment guaranteed under Act 43 and 48 of the EC treaty. It will take some more time and maybe chance for that matter to be dealt with by ECJ, until then Member States will have to address the issue case by case. From the cases that we have seen above we can safely conclude that restriction to the freedom of establishment is possible only when a company has to fulfil its obligations under the law of the Member State of incorporation as when it happened in the case of Daily Mail. Restriction on freedom of movement has been tried by member states on the bases of general interest, such as the protection of third parties, but none has been successful. Nonetheless the ECJ has acknowledged that such requirement "may, in certain circumstances and subject to certain conditions, justify restrictions on freedom of establishment." Case law so far has not given a preference for either the real seat theory or the incorporation theory, nonetheless from the rulings given it hints towards the incorporation theory. The principle of Freedom of establishment is a necessary principle as it is the only for Europe to be a common market for all the Member States. The ECJ's rulings have shown that such principle cannot be compromised even when the primary intention is circumvention of the law. References Cases: Commission v France [1986] ECR 273. The Queen v. H.M. Treasury & Commissioners of Inland Revenue, ex p. Daily Mail and General Trust Plc [1988] ECR 5483. Centros [1999] E.C.R. I-1494. Uberseering BV v. Nordic Construction Company Baumanagement GmbH (NCC) [2002] E.C.R. I-0991. Journals Xanthaki, H. 2001, 'Centros: Is this really the end for the theory of Siege Reel', Company Law, Vol.22, no.1, pp.2-8. McEleavy, P. & Micheler, E. 2003, 'Current developments-private international law', International and Comparative law Quarterly, Vol. 52, no. 2. Koller, T. 2004, 'The English limited company ready to invade Germany', International Company and Commercial law Review, Vol.15, no.11, pp.334-343. Ebert, S. 2004, 'The law applicable to groups of companies involving European companies (Societas Europea)', Company Lawyer, Vol.24, no.4, pp.108-113. Elbert, S. 2003, 'European Union: company law - freedom of establishment', International Company and Commercial Law Review, Vol. 14, no.5, pp.51-52. Johnson, M. 2004, 'Roll on the 14th Directive - case law fails to solve the problems of corporate mobility within the EU - again', Hertfordshire Law Journal, Vol.2, no.2, pp.9-18. Chertok, S.B. & Coburn, T. 2005, 'Jurisdictional competition in the European Community', ExpressO Preprint Series, paper 870. 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