Newtown Telecomms Plc - Initial Shares - Essay Example

Newtown Telecomms Plc: A Case Study 0 Introduction: Although a convenient form of business organization, the formation and administration of companies have lot of legal formalities to be complied with by the persons responsible for the running of the company. Elaborate provisions have been made with regard to the registration, issue of shares, and all other day to day administration is concerned. It is mandatory to comply with the requirements of the Company Law provisions, failure of which will attract the penal provisions laid out by the Act. In the instant case this paper studies the problems of Newtown Telecomms Plc, a public company limited by shares on the potential legal consequences of an anticipated complaint against its subsidiary company Mobilestoyou Limited, for loss of health and property by one of the customers of the subsidiary, under the provisions of Company Law. 2.0 Issue of Initial Shares: The Company was formed with 30,000 fully paid ordinary shares of ₤ 1 each subscribed by Peter, Paul and Mary While Peter and Mary pays the value of the shares by cash, Paul pays the cost of his shares by transferring the ownership of his 10 year old car to the company. The legal position with reference to the issue of initial shares is as under: Even though no maximum amount is prescribed for a public company limited by shares, a public limited company should have an authorized capital of at lease ₤ 50,000.1 ________________________________________________________________________ 1 Companies House Guidance Booklet December 2006 Chapter 2 Public Limited Companies PP 15 http://www.companieshouse.gov.uk/about/pdf/gbf1.pdf The Act does not specify any minimum capital for the private companies. In the case of Newtown the company was formed with the authorized capital of ₤30,000 which is in violation of the provisions of the company law. The company should increase the authorized capital by passing an ordinary resolution (unless the articles of association require a special or extraordinary resolution). A copy of the resolution - and notice of the increase on Form 123 - must reach Registrar of Companies within 15 days of being passed. The Company Law has not laid any restrictions on the allotment of shares for consideration other than cash. Generally shares may be allotted for payment: wholly for cash; partly for cash and partly for a non-cash payment; or wholly for a non-cash payment. Hence the allotment of shares to Paul against the value of his cars does not pose a problem. However the company should file a form 88(2) showing the extent to which the shares are to be treated as paid-up. The form should also specify a brief description of the non-cash payment for which the shares were allotted 3.0 Legal Position with Regard to the Complaint from the Customer on Loss to Property and Health: As corporate affairs became more complex and group structures emerged (where a parent company organises its business through a number of subsidiary companies in which it is usually the sole shareholder) the companies acts began to recognise that treating each company in a group as separate was misleading. Over time a number of provisions were introduced to recognise this fact. The case of Jade in claiming loss of health and property is on similar lines of Adams v Cape Industries Plc (1990) Ch. 433 which is connected with the phenomenon of ‘lifting of corporate veil’. Facts of the case: Until 1979, Cape, an English company, mined and marketed asbestos. Its worldwide marketing subsidiary was another English company, named Capasco. It also had a US marketing subsidiary incorporated in Illinois, named NAAC. In 1974, some 462 people sued Cape, Capasco, NAAC and others in Texas, for personal injuries arising from the installation of asbestos in a factory. Cape although protested the case on the ground that the Texas court has no jurisdiction, ended up in settling the case. Subsequently Cape formed other subsidiaries, this time with the intention to reorganize the business in US for taxation and other liability issues. Further claims from 206 cases were decided against Cape and Capasco which were not settled by them. Here also Cape used the defence of jurisdiction. In 1979 Cape sold its asbestos mining and marketing business and therefore had no assets in the US. Adams sought the enforcement of the US default judgment in England. The key issue was whether Cape was present within the US jurisdiction through its subsidiaries or had somehow submitted to such jurisdiction. The only way that could be the case was if it lifted the veil of incorporation either treating the Cape group as one single entity, or finding the subsidiaries were a mere façade or that the subsidiaries were agents for Cape. Based on the facts of the case of Adams v Cape Industries Plc, Jade can proceed against NewtownTelcomm Plc in the following grounds with a plea to lift the corporate veil: By treating Newtowm Telecomm plc and Mobliestoyou Limited as one single economic entity By claiming that the forming of the subsidiary Mobilestoyou Ltd was a mere façade or By claiming that the subsidiary was the agent for Newtown Telecomms plc. However Jade cannot be advised with certainty that her claim for compensation will succeed because of the decisions of the courts in the case of Adams v Cape Industries Plc and various other cases. In order to decide on the ‘single economic unit’ the court has to be satisfied about the lack of clarity about a statute or document establishing the connection between the entities involved. In this case Salomon v A. Salomon & Co Ltd [1897] AC22 the court concluded that “upon incorporation, a new and separate artificial entity comes into existence. At law, a corporation is a distinct person with its own personality separate from and separate artificial entity comes into existence. At law, 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. It follows that the rights and duties of a corporation are not the rights and duties of its directors or members who are, most of the time, obscured by a corporate veil surrounding the company.2 ________________________________________________________________________ 2 Gonzalo Villalta Puig (2000) E Law – Murdoch University Electrical Journal of Law Vol 7 No 3 http://www.murdoch.edu.au/elaw/issues/v7n3/puig73a.txt While considering the issue of ‘mere façade concealing the true facts’ the Court of Appeal recognised it as being a well established exception to the Salomon principle. In the case of Jones v Lipman (1962), Mr Lipman’s created the company solely with the aim of getting away from the effect of an intended transaction. In determining whether the company is a mere façade the motives of those behind the alleged façade may be relevant3. Applying this principle, the Court of Appeal looked at the motives of Cape in structuring its US business through its various subsidiaries. It found that although Cape’s motive was to try to minimise its presence in the US for tax and other liabilities there was nothing legally wrong with the motive of Cape. Similarly on the consideration of the ‘agency’ argument, which was a straight forward application of agency principle, the court examined whether the subsidiary was Cape’s agent and was acting within its actual or apparent authority. In that case the actions of the subsidiary would bind the parent. The court found that the subsidiaries were independent businesses free from the day to day control of Cape with no general power to bind the parent. Therefore Cape could not be present in the US through its subsidiary agent. Apart from the judgments in some stray cases like Creasey v Breachwood Motors Ltd (1992) BCC 638 the decision in Cape has dominated the case law since. With the reading of the above principles laid down by the courts: ________________________________________________________________________ 3 Dr. A. Dignnam (2005) Lecture 2: Lifting the Veil, Company Law University of London External Programmae available at http://www.londonexternal.ac.uk/current_students/programme_resources/laws/law_docs/autumn_finals_2006.pdf Newtown Telcomm plc and Mobilestoyou Limited cannot be treated as one single economic and unit and proceeded with for the claim from Jade for the loss of property and health. Also it cannot be proved that the forming of the subsidiary Mobilestoyou Limited was a mere façade although the company Mobilestoyou Limited was formed with an intention to avoid the liabilities that may arise from the potential claims on loss of health by using the mobile phone equipments. The action of Newtown Telecomms plc in promoting the subsidiary as a separate entity for the manufacture and marketing of the mobile phone equipments cannot be questioned under law as being done with a malicious intention. Similarly the agency theory cannot also hold good in the case of these two companies. The mere fact that the letters written to Mobilstoyou Limited are being replied by the parent company does not make any difference in the legal position of both being separate entities. 4.0 Conclusion: Occasionally if there is fraudulent behaviour, the court will usually lift the veil but most of the big cases fall short of fraud and are cases of deliberately avoiding liability through the use of the corporate form. There is usually moral culpability on the part of those behind the company but nothing illegal. At various points the courts have been more inclined to lift the veil than others. Currently the Adams case holds sway and thus the veil of incorporation is a rigid construct. Read More