The Concept of Nullity - Assignment Example

The Concept of Nullity According to Black’s Law Dictionary1, nullity means something that is legally void; forged commercial transfer is a nullity. Therefore, nullity is the fact of being legally void. Nullity has then been classified by Black’s as absolute nullity and relative nullity. Absolute nullity is an act that is void because it is against public policy, law, order whereas relative nullity is a legal nullity that can be cured by conformation because the object of the nullity is valid. As is common knowledge the essence of the concept arises out of Art.10-12 of the 1st EC directive on Company laws. The paper is meant to examine that in the light of the changing circumstances and amidst the call for greater uniformity in business laws whether the age-old and well settled English position on company law needs a change to include this concept. It is therefore important to first understand the situation from a generalistic angle and then to approach it from a more EC oriented point of view. Nullity of a company as is practiced currently can chiefly be of the following two types : Nullity before incorporation Nullity due to lack of recognition of existence Interestingly the wording of the EC directive on this point presupposes the existence of what can be called void nature of a company. This is interesting even more as the provision under Art.10 is qualified to exclude countries with proper preventive mechanism, either administrative or judicial.2 Therefore the study will look into whether English law at all needs to adopt a separate principle or whether the common law through practice has already created a parallel option to this.3 Therefore in case of an effective control system there is hardly any requirement for this part of the directive to effected in that country. If the requirement is to uniformise EU then that should be seen from the effect and not the method. To understand the effect it is simple to understand the simple drafting format of Art.11 of the directive which states the concepts effective meaning in details. It is not a new concept even for the beginners of English law that at times even before the procedure for registration and incorporation is complete a company (which then is not a legal person) may enter into deals and agreements and in such cases ordinarily the liabilities connected to such contracts lie with the promoters and not the company. The Types of Nullity of company The first type mentioned is nullity before incorporation, a concept akin to the idea of pre-incorporation contract where the British law is quite settled. This type of nullity receives a relatively detailed discussion in a Dutch case4 even though the applicability of art.10-12 of the EC directive on the backdrop of then existing Dutch company law.5 This case dealt with a similar situation and the facts of the case are briefly discussed below along with the decision. The Court answered a few questions. The first two questions were concerned in substance with whether the regime of nullity provided for by the First Directive was applicable in circumstances where acts had been done in the name of a private company which had not been formed under national law because the required formalities had not been complied with. The last two questions basically sought to determine whether the answer to the first two questions would be different where the appearance of a company in the sense of the First Directive had been created, as a result of the use of an association of persons or a business entity not governed by the First Directive. These questions were obviously influenced by the use which was made of the commercial partnership Ubbink Isolatie. It held that, in consequence, the regime of nullity provided for by Section II of the First Directive was only applicable when third parties had been led by the information published about a company, in accordance with Section I, to consider that a company covered by the Directive existed. Perhaps unsurprisingly, the Court held that third parties were not in such a situation where no publicity formality relating to a company covered by the First Directive had been completed, particularly where the requirements for formation under national law, consisting of a notarial act of formation, and the grant of a declaration of no objection, had not been completed, and the company appeared in the Commercial Register as one undergoing formation. The answer to the first two questions put to the Sixth Chamber was thus that the regime of nullity of companies covered by the First Directive was inapplicable where acts were done in the name of a private company the existence of which was not made apparent in the public register, because the requirements for formation under national law had not been completed. The Sixth Chamber found that its reply to the first two questions enabled it to answer the questions of Community law asked it, and thus it did not attempt any examination of the third and fourth questions submitted to it. It will be remembered that they concerned entities which are not covered by Community law. It added that, to the extent that acts accomplished in the name of a private company as yet unformed might be considered, according to the applicable system of national law, as acts accomplished in the name of a company undergoing formation within the meaning of art 7 of the First Directive, this system of national law was required to make provision for the joint and several unlimited liability of the persons who carried them out.6 It is interesting to note that, in consequence of the ruling, the only provisions of Dutch law governing the nullity of private companies, which are contained in s 182 of Book II of the Civil Code, must be treated as being outside the ambit of arts 11 and 12 of the First Directive. The information published about a company, which would lead others to the conclusion that it existed, spoken of in the ruling would appear principally to consist of the registration of the date of formation of the company in the public register. It would be difficult and perhaps impossible to show that third parties had not taken cognizance of this matter. It is arguable that the preliminary ruling places too much emphasis on the registration of the company. It might thus be contended that, as the Netherlands Government argued in its submissions, it follows from art 3(7) of the First Directive that a third party ought to be entitled to rely on an unregistered deed of formation of a company, of which he has somehow obtained knowledge, provided that non-registration does not deprive it of legal effects. If the Sixth Chamber had given emphasis to this view, it would very probably have found that the regime of nullity embodied in Section II of the Directive was applicable under the former circumstance. Its failure to reach this conclusion may be explained on the basis of the fact that no deed of formation of Ubbink Isolatie BV was ever prepared. Furthermore, the adoption of the rule suggested might well lead to uncertainties. The approach taken under German law to the nullity of public and private limited companies somewhat resembles that taken by the Sixth Chamber of the European Court in the above-mentioned preliminary ruling. By para 275(3) of the Aktiengesetz and para 75 of the GmbH Gesetz, an action to annul a company may be brought within three years of its registration. The grounds for such annulment, which all conform with the requirements of art 11 of the First Directive, are that the articles do not contain provisions governing the amount of the stated capital, or the objects of the company, or that the objects of the company are unlawful. However, it is generally agreed by German text writers that an unregistered company may be annulled on wider grounds, derived from the ordinary provisions of civil law applicable to partnerships. Nullity due to lack of recognition of Existence It is important to understand that issues of nullity can come up in case of Multi-national companies The question often is that if a company is registered and incorporated in one country but has business and transactional presence in another country, then if there is no registration in that country then it may not be considered to have the status of a separate legal person in that country. The "place of incorporation theory" determines a corporations nationality by its place of incorporation, i.e., the place where it is registered as a corporate entity.7 A corporation incorporated in the United Kingdom is therefore a British corporation. The "real seat theory," however, relies on the corporations seat of administration,8 which is defined as the place where the basic decisions of the board are effectively transformed into daily managerial and administrative decisions.9 Therefore, if a corporation incorporated in the United Kingdom is managed from Germany,10 Germany would regard it as a German corporation11 -with devastating effects. Until recently, the German Supreme Court for Civil Law argued as follows: since this German corporation is not incorporated and not registered in Germany, it is non-existent, a nullity. As such it does not have legal personality and can neither own property, nor contract, nor sue.12 But such a foreign corporation can nevertheless be sued. Moreover, its members and everybody acting on its behalf will be held liable for its debts.13 The court has now joined the majority opinion among legal scholars and treats a foreign corporation having its real seat in Germany as a German corporation. It is therefore no longer considered to be a nullity for failure to incorporate according to German law, but is treated as a general, partnership-like, company.14 These partnership-like companies 15 have at least limited legal personality and can own property and both sue and be sued, yet the downside is that the legal principles governing these companies provide for unlimited liability of the partners. The situation had once culminated in a landmark tort case on alien property in Daimler Tyre Company case, in which a company despite having all its shareholders in England but being registered in Germany, the Company was considered alien property, The place of incorporation theory however, obviously found its biggest support in the verdict of the International Court of Justice in the Barcelona Traction Company16 case .However in such cases, at present nullity is no more attracted as that would make the position of many trans-national corporations untenable . Consequences of EC Directive and Nullity The EC directive lists out both the elements of nullity and the consequences of nullity. The Directive also limits the grounds for the nullity of companies the Directive. Nullity must be ordered by a decision of a court of law. Company reliance as against third parties on a courts declaring nullity is governed by the same rules as reliance with regard to matters required to be filed or published. Nullity entails the winding up of the company, as may dissolution. Nullity does not per se affect the validity of any commitments entered into by the company or with it, "without prejudice to the consequences of being wound up." The consequences of nullity as among companys members is a matter for the laws of the Member States. Where the companys members have not paid the subscriptions for capital which they had agreed to pay, they remain obliged for them to the extent that fulfillment of commitments to creditors require their contributions. This Directive, as the ECs first effort to harmonize company law, was significant in laying a foundation for future directives. It has now been implemented in all Member States. By requiring the publication of important information about marketable share companies and private limited companies and the establishment of registries in the Member States, minimum standards of disclosure for companies throughout the EC were created. The Directives that followed have repeatedly employed these provisions on publication and registration for the benefit of their own purposes. Also significant is the First Company Law Directive is the restriction on the application of the doctrine of ultra vires. Although the Member States are not required to have provisions for declaring a company to be null, the limitation of the circumstances under which a company can be declared null provides greater certainty in transactions of a multinational character within the EC.17 Nullity must be ordered in a court judgment.18 Finally, when the recipient companies already own all of the shares of the company being divided and all other securities conferring the right to vote at general meetings, the laws of the Member States must permit it to complete the division under special rules relaxing the conditions applicable to division by acquisition.19 The laws of the Member States applicable to EEIGs may provide for the declaration or establishment of nullity by judicial authority. The nullity of an EEIG entails its liquidation under the procedures specified by the statute. A decision establishing the nullity may be relied upon as against third parties in accordance with the conditions specified in national law on the coordination of safeguards pursuant to the First Company Law Directive. Nullity raises important questions regarding the validity of transactions carried out with the nullified company done at a pre-nullification stage as nullification means that the company never existed. The consequences of declaration of nullity of a company are well laid down in Art. 12 of the Directive. This therefore does not warrant an explanation in this paper. In practice the consequences of indirect effect can come very close to those of direct effect. In Marleasing, the ECJ held that the requirement to construe national law in conformity with the directive at issue precludes the interpretation of the former in such a manner that other grounds of nullity of companies than the ones listed in the Directive apply (para. 9). It follows that the principle of consistent interpretation in Community law goes further than a general incentive to reconciling interpretation. It is therefore important to discuss the English position to reach the major culmination of the paper. English Law The English law ‘s greatest strength for a length of time has been its ability to adopt through case law and precedents. Therefore in spite of not accepting the EU position by name it is more than capable of adapting to the concept. As mentioned earlier, it is possible to draw analogies in most cases with situations in English law. The company as legal person Upon the issue of the certificate of incorporation, the company becomes a body corporate or, in other words, a corporation (1948 Act, s. 13(2), as amended by the 1980 Act). Prior to the date of the certificate the company has no legal existence.20 A corporation is not, like a partnership in English law or a family, a mere collection or aggregation of individuals. In the eyes of the law it is a person distinct from its members or shareholders, a metaphysical entity or a fiction of law, with legal but no physical existence. It is, as Lord Selborne said,21 “a mere abstraction of Law,” and, as Lord Macnaghten observed,22 “at law a different person altogether from the subscribers to the memorandum of association.”23 Reduction of number of members below legal minimum Even if the number of members fall below two,24 the company continues to have a separate corporate existence. This fact can be a source of considerable embarrassment, particularly in a private company, for it may happen that all the directors die and only one shareholder remains, so that it is impossible, under the company’s articles, for the company to continue to function, since there are no directors to act on behalf of the company or to convene a general meeting. On occasions a company may even be left with no directors or shareholders alive, but the company does not thereby cease to exist. Private companies The fact that a company has a separate persona is sometimes overlooked in the management of private companies. Thus, in Re Strathblaine Estates Ltd. 25, in the voluntary winding up of a private company, it was resolved to divide the surplus assets - freehold properties - in equal shares between the shareholders and, after the discharge of its liabilities, the company was dissolved, but the legal estate in the properties was not conveyed to the shareholders who were merely given the title deeds. In this case the consequences, which could be rectified by a vesting order under the Trustee Act 1925, s.44(ii) (c ), were not serious because the failure to treat the company as a separate person affected only the members. Pre-Incorporation Contract Before its incorporation a company has no capacity to contract. Consequently in common law no body can contract for it as agent nor can a pre-incorporation contract be ratified by company after its incorporation.26 If a pre-incorporation contract is purported to be made by a company which does not exist, the contract is a nullity, and neither the company, when formed, nor the promoter whose signature is added can sue or be sued on the contract.27   In a case28 regarding pre incorporation contracts and whether they would be binding on agents of the company (which was never formed). The dispute was regarding the enforceability of a contract for purchase of land. The Court of Appeals held "that on its true construction section 36C(1) of the Companies Act 1985 not only made a party who entered into a contract as agent for an unformed company personally liable on the contract but also entitled the agent to enforce the contract himself unless ordinary common law principles prevented him." Thus, in this case the contract was allowed to be enforced as against the agents in their individual capacity.29 Conclusion Therefore in this present situation the common law followed in England will succeed in meeting the demands of the market and the fast changing global legal requirements. The important issue however remains is the sheer political and economic requirements to comply with the EC and to be seen to be doing so. Therefore, there is a need to comply and be seen that way as that would help the trade situation in U.K. Thus, there is no legal requirement to introduce the concept of nullity in the English company law, but due to the pressures of EU it might have to adopt the situation. Bibliography Books 1) Brownlie, Ian, Public International Law, Oxford Univerity Pres 2004, 7th Edition. 2) Palmer’s Company Law, 23rd edition, C. M. Schmitthoff, Ferrar et al., Stevens & Sons, W. Green & Sons, 1982. 3) Garner, Bryan A, Black’s Law Dictionary, 7th Edition, 2004. Articles 1) Wooldridge, Frank, The Application Of The First Directive Regime Of Nullity To Unregistered Companies, Comp. Law. 1990,11(3), 62-63. 2) Kersting Christian, Corporate Choice Of Law--A Comparison Of The United States And European Systems And A Proposal For A European Directive; 28 Brook. J. Intl L. 1 3) English Richard D., Company Law In The European Single Market, 1990 BY.U. L. Rev. 1413. Read More