UK Company Law - Term Paper Example

 «UK Company Law» Introduction Aron Salomon was a cobbler. He was a boot-maker at a very bad time for boot-makers. He incorporated his business in 1892. Immediately thereafter a wave of strikes disrupted the industry and Salomon's main customer, the British military, drastically reduced its orders. Salomon Co. quickly became insolvent despite Aron's best efforts. A succession of court cases and lower court decisions ultimately resulted in the House of Lords ruling that Salomon Co. and Aron Salomon were not one and the same, “"The very object of the creation of the company and the transfer to it of the business is, that whereas the liability of the partners for debts incurred was without limit, the liability of the members for the debts incurred by the company shall be limited,” concluded the House of Lords. (“1897, the Salomon Case: Judicial Life Breathed Into Corporations”) Aron Salomon, the individual, was not liable for the debts of Salomon Co., a separate legal, corporate entity. This case was based on the Companies Act 1862 that clearly established the corporation as a separate legal entity. Salomon v Salomon Co. established that this was the legal situation even if one individual was a majority owner and principally responsible for the direction of the corporation also. According to Villalta Puig Gonzalo, “The case firmly established that upon incorporation, a new and separate artificial entity comes into existence.... a corporation is a distinct person with its own personality separate from and independent of the persons who formed it, who invest money in it, and who direct and manage its operations.” (Gonzalo, 2000) The principle of separate corporate personality has become a central pillar of modern corporate law. since the celebrated case of Salomon v Salomon & Co. (1897) when the House of Lords ruled that, a corporation, as a separate legal entity is wholly and solely responsible for its actions. The breadth of the implications of this decision are profound. It is not hyperbole to state that it has a fundamental impact on the principle of obligation and laws of obligation. In terms of contract law any contracts that a corporation breaks and any debts that it owes are not the obligations of the directors, the shareholders or the employees: They are solely the responsibility of the corporation. In terms of negligence a shareholder or a director can never be assigned a 'duty of care' or negligence thereof for an action of a corporation: 'Duty of care' is wholly and solely the responsibility of the separate corporate entity. Most recently, questions about the pension implications of this situation have also arisen and been addressed in the Pensions Act 2004. The following discussion will look at the evolution of corporate transparency and the corporate veil in the century-plus since the Salomon decision. The discussion will commence with consideration of the Adams v Cape Industries plc [1990] Ch 433. The case and judgment will be summarized. Then they will be assessed in light of Boyle and Birds' assertion, “In its landmark decision in Adams v Cape Industries plc, the Court of Appeal took the opportunity to attempt to bring some order to the rather confused body of case law relating to the question of lifting the veil where groups of companies are concerned.” (Boyle, Birds, et al., p. 74) The validity of this glowing assessment will be examined. The next subject for discussion will be case law since 1990 in the wake of Adams v Cape Industries plc. How subsequent decisions delineated or extended Adams v Cape Industries plc will be analyzed. Then recent Pension Act changes that relate to the corporate veil will be examined. The concluding section will present an overview of company law as it pertains to the corporate veil and corporate transparency will be considered. Adams v Cape Industries plc and beyond Adams v Cape Industries plc was a complicated case involving international jurisdiction and claims of negligence through breach of duty of care, and expert and ground-breaking medical evidence. It also had profound implications for issues of corporate transparency and the corporate veil. Briefly, Cape Industries plc had been involved in the mining of asbestos in South Africa and its processing around the world since before the Second World War. In the 1980s it became the subject of a class action suit brought by a group of American employees. The former American subsidiary – Capasco (CPC) and North American Asbestos Company (NAAC) – had been formed by Cape Industries as wholly owned subsidiaries to market asbestos in the United States. It no longer existed and had no resources to pay any civil judgement. Therefore, American attorney's tried to establish that the parent Cape Industries plc was liable for the performance of its American subsidiary. However, the Court of Appeal stuck to a rigid interpretation of Salomon. It ruled that “the right to use a corporate structure in this manner is inherent in our corporate law. ... in our judgement Cape was in law entitled to organise the group's affairs in that manner …" That the arrangement served to protect the parent corporation from liability was not, in and of itself, illegal. In fact, the court held that in not specifically legislating against that very possibility the act was, implicitly, condoning application of the act in that manner. Had that have been the extent of the legal reasoning the case would hardly be regarded as a landmark. Nor would it merit the praise that Boyle and Birds give to it. They assert that it brought, 'some order to the rather confused body of case law relating to the question of lifting the veil where groups of companies are concerned.”' The court considered three legal arguments in coming to the conclusion that the British parent was not liable for the actions of other members of the group. In dismissing each it implied arguments or exceptions that could, on a case-by-case basis, be argued as reasons to lift the corporate veil in the interests of corporate transparency. It is in this sense, by establishing the key issues at law, in questions of intra-group liabilities, that it represented a landmark. It did not necessarily answer the questions, but it presented the questions that had to be considered on a case-by-case basis, to rule on the corporate veil and intra-group liabilities. First the Court of the Appeal considered the possibility and significance of Cape and its American subsidiaries operating as a single economic entity. In D.H.N. FOOD DISTRIBUTORS LTD. v. TOWER HAMLETS LONDON BOROUGH COUNCIL, BRONZE INVESTMENTS LTD. v. SAME, D.H.N. FOOD TRANSPORT LTD. v. SAME [1976] 1 W.L.R. 852 the Court of Appeal ruled that multiple corporate entities operating as one were to be seen as one: “This case might be called the “Three in one.” Three companies in one. Alternatively, the “One in three.” One group of three companies. For the moment I will speak of it as “the firm,” began Lord Denning's decision. Lord Genning took note of the exceptionally close bonds between D.H.N. Food Distributors Ltd. And its subsidiary Bronze Investments Ltd.: The directors of D.H.N. were the same as the directors of Bronze; the shareholders of Bronze were the same as in D.H.N., the parent company, and they had a common interest in maintaining on the property concerned the business of the group. If anything were necessary to reinforce the complete identity of commercial interest and personality, clause 6, to which I have referred already, demonstrates it, for D.H.N. undertook the obligation to procure their subsidiary company to make the payment which the bank required to be made. (DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 856) Adams v Cape Industries plc acknowledged this earlier ruling. However, it was held to be irrelevant in the Cape case as the subsidiary and the parent were not exceptionally tightly tied. No wording in any of the corporate documents evidenced an unusually close bond, a bond that would classify the contracting parties as a 'single economic entity.' In other words, a subsidiary and a parent are not a 'single economic entity' unless evidence indicates an 'exceptionally' close bond. The second consideration was 'sham'. In Adams v Cape the court considered whether or not the American subsidiaries were 'shams': facades set up to evade legislative and regulatory requirements or shells created to protect the parent company from future liability. The court placed a strict interpretation on the term sham. The court ruled that future liability had no role in determining if something was a .sham'. It also ruled that no specific evidence established that Cape's American subsidiaries were established to evade legislative and regulatory requirements. Again, the court acknowledged the possibility of 'sham', but did not see it evident in the case of Cape. The court acknowledged Gilford Motor Co Ltd v Horne (1933) as a precedent. In that case a vehicle salesman left his employ with Gilford Motor Co. Ltd. having agreed to a no compete clause. He subsequently set up a corporation and through it approached his former customers with Gilford and violated the no compete clause. His defense that his firm not himself was approaching the customers and that it was the firm not himself that was guilty of misconduct, if there were any, was firmly rejected by the courts. In Cape the court ruled that this intention to deceive and blatant deception – 'sham' – was not evident and so 'sham' did not apply. Finally, the court dismissed any possibility that the subsidiaries were mere agents of Cape. This was a relatively straightforward factual argument: The two subsidiaries also marketed other products from other manufacturers and were in no way linked to Cape to the exclusion of all others. The first two points were the key arguments in the case. In Cape the court ruled that corporate liability could not be extended up the ladder within a group to the parent corporation unless extraordinary circumstances were established with evidence that demonstrated malfeasance (evasion of legislation and regulations), or an exceptionally close economic relationship. On the one hand Adams v Cape plc established a very strict interpretation of Salomon. On the other hand, it established determinants of situations and conditions that permit the corporate veil to be raised. The question that persists is how much order has Cape brought to the question of corporate personality, liability and transparency. The answer it would seem is very little beyond that already imposed by the Companies Act 1985. The Companies Act 1985 outlined very specific circumstances in which a director can be liable for a company's actions, employee rights within a group of companies, the importance of groups of companies acknowledging their internal relationships and economic links and other details. However, it offered no clarity into situations in which the corporate veil could be raised. The waters remain very muddied today. In all aspects of the law of obligation corporate responsibility lacks transparency, liabilities are often artificial shifted or hidden, and confusion and prevarication seem to be the order of the day. The Pensions Act 2004 The broadening implications of corporate transparency and the corporate veil has also spread into pension considerations. Many individual firms are facing pension deficits and related problems as retirees increase and pension funds deal with the fallout from the great recession. The question of who is liable for these pension fund deficits will provide a new frontier in corporate veil legislation as fund members attempt “to prevent sponsoring employers of pension schemes from walking away from their liabilities.” (Pollard, et al., 2010) In the United Kingdom new powers allow the Pensions Regulator to "pierce the corporate veil" by issuing notices not just to sponsoring employers but also to group companies and certain other associates.” (Pollard, et al., 2010) In the near future as the number of pensioners increases rapidly and issues of pension fund liabilities arise more frequently it will become an important segment of corporate personality law. Conclusions Boyle and Birds credit Adams v Cape with attempting to bring some order to the confusing body of case law around corporate personality. Their praise seems unjustified. The attempt may have been honourable but it is difficult to see that the body of law around corporate personality has been simplified in the wake of Adams v Cape plc. Finally, an entirely new set of issues related to corporate personality and questions of group organisation and liability as they relate to pensions has emerged. Overall, therefore it is difficult to see any attempt to bring order to questions of corporate transparency or the corporate veil that has had a significant impact. The entire field remains one largely left to the courts to interpret on a case-by-case basis. Arguably, the persistence of this case-by-case process indicates that the entire principle of corporate personality and responsibility is flawed. The case-by-case approach could be described as a temporizing way of avoiding the most egregious problems the flawed theory presents in practise. In fact, some critics of the approach argue that the existing practise condones egregious breaches of fundamental justice. In the wake of Adams v Cape plc, The Cambridge Law Journal Published a commentary entitled simply, “Conflicts and Company Law Combine to Bar Enforcement of Asbestosis Damages,” in it author J. G. Collier argued that the decision in Adams v Cape plc may have been legally justified but it left questions of fundamental justice and compensation unanswered. Salomon has been described as a blunt instrument and this is not unjustified. However, one needs to return to its origins and divest it of some of its mythic proportions. Salomon was a small manufacturer, his liabilities at court amounted to less than ten thousand pounds. It is even doubtful whether or not he intended to inappropriately expropriate funds or was simply an honest victim of an economic downturn. Perhaps, in simplest if shocking terms, Salomon is no icon. Perhaps it was never meant to be the basis of legislation and jurisprudence that decides the fate of multinational or even extra-national corporations with operations that span the globe, budgets in the billions of euros, and shareholders spread across the globe. Shocking as it may sound, it may be time to acknowledge that Salomon v Salomon is not all 'its cracked up to be. Perhaps the entire paradigm needs to be reconsidered. At present the default setting in the legal system is corporate autonomy. Corporation A and its subsidiary, B, in country C are autonomous of one another (i.e. separate individuals), unless exceptional circumstances of 'sham', economic unity, or agency, exist. The burden of proof lies with the party that alleges a relationship between companies within a group or between a company and its subsidiary. Perhaps the burden of proof needs to be shifted. Perhaps it should be assumed that companies within a group are linked or that a parent corporation controls a subsidiary unless evidence can be produced to the contrary. Bibliography Legislation Companies Act 1862 Companies Act 1985 Pensions Act 2004. 2004 CHAPTER 35. Web. http://www.opsi.gov.uk/acts/acts2004/ukpga_20040035_en_1. Accessed 8 August 2010. Cases Cited Adams v Cape Industries plc [1990] Ch 433 Connelly v RTZ Corp Plc [1998] AC 854 DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852. Gilford Motor Co Ltd v Horne [1933] Ch 935. Lee v Lee’s Air Farming [1961] AC 12. Lubbe v Cape Plc [2000] 1 WLR 1545. R v Arnaud (1846) 9 QB 806. Salomon v A. Salomon & Company, Limited, [1895] 2 Ch. 328. Salomon v A. Salomon & Company, Limited, [1897] AC 22. Sutton's Hospital (1612) 77 ER 960. Secondary Sources “1897, the Salomon Case: Judicial Life Breathed Into Corporations”. http://www.duhaime.org/LegalResources/ConsumerCommercial/LawArticle-1197/1897-the-Salomon-Case-Judicial-Life-Breathed-Into-Corporations.aspx. Boyle, A. J. & John Birds, et al. (2009) Company Law. 7th ed. Jordan: London. Collier, J. G. (1990) Conflicts and Company Law Combine to Bar Enforcement of Asbestosis Damages” The Cambridge Law Journal. 49: 3. pp. 416-418 Gonzalo, “Villalta Puig. (2000) “A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine”. Murdoch University Electronic Journal of Law. 7: (3). Web. http://www.murdoch.edu.au/elaw/issues/v7n3/puig73a.txt. Accessed 7 August 2010. Morse, C. G. J. (2002). “Not in the public interest? Lubbe v. Cape PLC” Texas International Law Journal. Web. http://www.allbusiness.com/legal/international-law/1032026-1.html. Accessed 8 August 2010. Pollard, Daniel, James A. Cox, James Barabas and Wayne P.J. McArdle. (2010) “UK Pensions Regulator issues first contribution notice”. Web. http://www.lexology.com/library/detail.aspx?g=49624f1a-8c79-435e-8c3f-51a44879a418. Accessed 7 August 2010. Tweedale, Geoffrey and Laurie Flynn. (2007). “Piercing the Corporate Veil: Cape Industries and Multinational Corporate Liability for a Toxic Hazard, 1950–2004””. Enterprise and Society. Read More