Nullity of a Company in English Law - Case Study Example

Nullity of a Company in English Law In the ment 'English law has no need of the alien concept of nullity of a company', determining whether itis a correct statement of the legal situation requires answering two separated, but related questions. First, whether or not the concept of nullity of a company is truly an alien concept in English Law; and second, given the answer to the first, whether there is a need to apply the concept of nullity of a company in English Law. In order to answer both questions, and consequently determine whether the aforementioned statement correctly describes the legal situation, this essay will first describe the concept of nullity of a company by describing the concept, determining the legal entity that it refers to, and determining the effect that the concept will have on such entity. The essay will then discuss whether such concept is used in English Law as illustrated through cases. Lastly, the essay will then assess, based on the use or lack of usage of the concept of nullity on English Law whether there is a need for such concept. Nullity is a concept that renders an entity, in this case a company, insignificant and non-existent, such that any act made by or in behalf of that company will be rendered invalid as well. This declaration, as recognised by the First Council Directive 68/151/EEC ('First Directive'), is imperative to protect the company in question and their shareholders, as well as third parties that transact with them because of the possible retroactive effect it will have on these parties' actions. Hence, as called for by the First Directive, countries must limit the cases of nullity to decisions by a court of law, and on the grounds that (a) that no instrument of constitution was executed or that the rules of preventive control or the requisite legal formalities were not complied with; (b) that the objects of the company are unlawful or contrary to public policy; (c) that the instrument of constitution or the statutes do not state the name of the company, the amount of the individual subscriptions of capital, the total amount of the capital subscribed or the objects of the company; (d) failure to comply with the provisions of the national law concerning the minimum amount of capital to be paid up; (e) the incapacity of all the founder members; (f) that, contrary to the national law governing the company, the number of founder members is less than two.1 In this sense, the concept of nullity of a company, as proposed by the First Directive, has a two-fold objective: it is meant to protect companies from trivial and unlawful declarations of nullity, which can be to the detriment of its operations by limiting the grounds for declaring it; and it is meant to protect a company's creditors, as well as the public, by preventing transactions for unlawful and fraudulent acts of unregistered or unlawfully registered companies. Thus, the effect of such declaration is a crucial aspect of company law because companies, as an artificial legal entity, have legal rights and obligations, which will be rendered null and void upon declaration of nullity. The status of companies as a legal entity is embodied in the company's corporate personality, which as stated in Salomon v. Salomon & Co (1897), a company in compliance with regulations of the Companies Acts are distinct legal entities, capable of incurring debts, limiting the liability of its members to the amount invested as prescribed by the companies Act.2 Thus, by virtue of its corporate personality, a company's shareholders and members, as a consequence, have limited liabilities. In addition, a company's corporate personality also accords to it the capacity to enter into legal contractual relations with other persons.3 However, while companies have limited liabilities to its shareholders, its shareholders are also limited in their ownership, such that they do not have ownership of the company's assets, as well.4 In this regard, it is important to note that not all companies have limited liability. As recognised by the Companies Act 1985, [a]ny two or more persons associated for a lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company, with or without limited liability.5 Thus, regardless if a company is a limited or unlimited liability corporation, companies only receive its corporate personality, and the rights and obligations that arise from it after they have been registered by the Registrar and issued Certificates of Incorporation. Furthermore, companies prior to incorporation are non-existent entities, such that they cannot be sued, be liable, incur debts, own assets, or exercise in the capacity of a legal entity. This is illustrated in Newborne v. Sensolid (GB) Ltd. (1954) where it was held that "as the company was not in existence when the contract was signed there was never a contract,"6 by virtue of the law of agency, where persons cannot become agents of non-existent entities, such as companies still under creation, who cannot confer rights or liabilities.7 In this case, the person acting as an agent is made liable for such contracts, such that as stated in the Companies Act 1985, [a] contract which purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable to the contract accordingly.8 Regardless of a company's status as a limited or unlimited liability company, its character as a separate identity is not enforced unless it is recognised by law. Hence, declaring a company a nullity will affect its status as a legal entity, rendering it incapable of going into legal contractual relations, as well as its ability to incur debt and own assets. In English Law there is no concept of nullity of company as laid out in the First Directive. This, however, does not mean that there is no protection given to companies and third parties in the same manner provided for by the concept of nullity of a company. Instead, this is embodied in the conclusive evidence rule where the Certificate of Incorporation issued by the Registrar, is conclusive proof that the registration requirements have been met, such that all formalities are correctly accomplished, and there exists a date of incorporation.9 It also indicates that the company formed is not against public policy nor is it unlawful, as illustrated by R v. Registrar of Joint Stock Companies, ex parte More (1931), where the Registrar refused to register a company deemed to have been formed "for a lawful purpose."10 With regard to public limited companies, it is required that a Trading Certificate be issued by the Registrar before the company can begin trading, which requires a certain amount of capital requirements to be met. An Incorporation Certificate's sufficiency as conclusive evidence is also upheld by the power of the Registrar to cancel such certificate if the company was formed for unlawful purposes, as illustrated in R v. Registrar of Companies, ex parte (1991), where the certificate issued for Lindi St Clair (Personal Services) Ltd." was quashed on this premise,11 such that it achieves the same effect as the concept of nullity of nullity outlined in the First Directive. Thus, the concept of nullity is not a totally alien concept in English Law, on the basis that there are precedents and statues, which can render companies void ab initio. This, therefore begs the question, is there a need for the concept of nullity in English Law As previously mentioned, Article 11 of the First Company Law Directive requires Member States to enforce legislations that ensure that nullity of companies are limited to certain grounds; that there must be a court declaration regarding nullity of companies; and that the disposal of company assets as a result would proceed in a manner as is the company were in legislation. It is this essay's argument that there is no need for the concept of nullity of company in English Law because on one hand, precedents in case law, as well as provisions under the Companies Act, are already in place, which has the same effect as the concept of nullity of a company; and because the concept, as provided for in the First Directive is unimportant, such that the instances that would require it are rare, and market-mimicking, whereas companies will comply with it, regardless of legislation. As illustrated in the beginning of the essay, case law precedents are already in place such that by virtue of the conclusive evidence rule, a company that has received a Certificate of Registration and has been properly registered by the registrar cannot be deemed void ab initio unless its registration is quashed on the grounds of unlawfulness or and illegality. Thus, this already accords to companies a certain degree of protection and limitation on the grounds at which they can be nullified. Furthermore, case law already contains precedents on the manner that a company's liabilities are to taken care of in the vent that it is considered a nullity. With regard to companies refused of registration, the Companies Act 1985 states that liability for pre-contractual arrangements fall on the agent acting in behalf of the company.12 In addition, as argued by Luca Enriques, some of the provisions laid down by the European Council regarding corporate directives are trivial, such that they are "optional, market-mimicking, unimportant, and/or avoidable."13 In this respect, the nullity of company can be considered as unimportant14 and avoidable. As defined by Bernard Black, an unimportant rule is one that "can be complied with at nominal cost, or involve situations that almost never occur."15 In this respect, the nullity of company, as outlined in the First Directive can be considered unimportant because despite the crucial significance it holds upon companies and the third parties they deal with, "[a] declaration of nullity was a rare occurrence even in those original Member States which recognized the concept, so that these provisions are relatively unimportant."16 Hence, case law precedents, in this case are adequate enough to address possible disputes that may arise from it. Furthermore, as realised by Enriques, these directives can be implemented accordingly by states, short of legislation, as well as "be avoided through proper planning."17 With the case of nullity of a company, proper planning can come about as a result of strict implementation and enforcement of the rules of registration of companies to avoid having to declare companies a nullity in the future. In this respect, rules and precedents are already enforced to guide such procedures. These are embodied in the Companies Act 1985 which lists the documents required for registration, as well the proper format and content of such documents, and the required fees to complete registration.18 Moreover, the insignificance of legislating provisions regarding the nullity of companies is also illustrated in the manner that it is market mimicking. Market-mimicking directives are directives where "[t]he force of the arguments for why a particular rule is market mimicking will depend on analogies, on the background and prior beliefs of the reader, on guesses about transaction costs, and on the force of alternative arguments."19 With regard to the concept of nullity, by virtue of the conclusive evidence rule, it is only logical for courts not to favour claims nullifying a company with conclusive proof of its registration; and at the same time, it is also logical that companies without such proof are deemed void ab initio and stripped of its corporate personality in the event that they are not properly registered companies. This is especially true as illustrated by the case of R v. Registrar of Joint Stock Companies, ex parte More (1931)20, where the registrar deemed it necessary not to register the company because its documents illustrate that the company is to serve an unlawful purpose, as well as in the case of R v. Registrar of Companies, ex parte (1991)21, where a company was stripped of its legal character by quashing its registration. On the other hand, as illustrated by Salomon v. Salomon & Co (1897),22 companies that are properly registered will not be deemed void ab initio insofar as it is a properly registered company. In this respect, there is no need for a nullity of company provision, insofar as English company law is concerned. However, it is still imperative to be certain of this in the context of EC Law. According to Marleasing SA v LA Commercial SA (1990), national courts are to interpret domestic laws in such a way that it ensures directives under Community law are achieved in light of its wording and purpose.23 Whereas as a result of this direct effect, failure to do so can lead to actions brought against Member States by its citizens if they incur damages as a result of their breach in Community law, as illustrated in R v Secretary of State for Transport ex parte Factortame (1996).24 In this respect, the United Kingdom, by not legislating provisions for the nullity of companies can be sued before the European Court of Justice as seen in R v Secretary of State for Transport ex parte Factortame (1998).25 However, while this is true, as illustrated in the previous paragraphs, it is unlikely to happen because by virtue of the conclusive evidence rule, precedents and statutory provisions are already in place to have the same effect as the nullity of company indicated in the directive. Furthermore, since the occurrence of nullity of company is rare and that the logic underlining the concept of nullity is commonplace, there are enough safeguards in the current English Law to prevent companies and the third parties they deal with to pursue available channels to safeguard their interests. In this sense, there is no need for the nullity of company in English Law both because there are already provisions and precedents that will have the same effect and because the chances for the UK to be sued on basis of its breach of EC Law are also insignificant. Thus, is the statement 'English law has no need of the alien concept of nullity of a company' a correct statement of the legal situation Based on the arguments set forth in this essay, it is not entirely accurate. While it is true that there is no need for the concept of nullity in English by virtue of the conclusive evidence rule, and the almost non-existent risks that not legislating such a rule entails, it is incorrect to state that the concept of nullity is an alien concept in English Law. Although there is no explicit rule to state nullity of a company, precedents and other provisions in the Companies Act 1985 illustrates that the concept is implied in English Law. However, one will still be mistaken in claiming that the statement is an incorrect statement of the legal situation because while it is incorrect to assert an "alien concept of nullity", this fact does not render the spirit at which the statement is uttered completely inaccurate, which is that there is no need for the concept of nullity in English Law. Hence, the statement, although not entirely incorrect, is still an inaccurate description of the legal situation. References Cases Cited Lee v. Lee's Air Farming (1961) AC 12. Kelner v. Baxter (1886) LR 2 CP 174. Macaura v. Northern Assurance Co. (1925) AC 619 Marleasing SA v LA Commercial SA (1990) ECJ. Newborne v. Sensolid (GB) Ltd. (1954) 1 QB 45. R v. Registrar of Companies, ex parte (1991) BCLC 476. R v. Registrar of Joint Stock Companies, ex parte More (1931) 2 KB 197. R v Secretary of State for Transport ex parte Factortame (No. 4) [1996] ECJ. R v Secretary of State for Transport ex parte Factortame (No. 5) [1998] CA. Salomon v. Salomon & Co. (1897) AC 22. Legislation Companies Act 1985 (UK) European Community First Council Directive, 68/151/EEC, Art 11. Secondary Sources Black, Bernard S. (1990). "Is Corporate Law Trivial: A Political and Economic Analysis", 84 NW. U. L. REV. 542, 1990. Edwards, Vanessa (1999). EC Company Law 1, 1999, p. 46. Enriques, Luca (2005). "EC Company Law Directives and Regulations: How Trivial Are They", Law Working Paper N 39/2005, [available online], http://ssrn.com/abstract=730388, accessed 17 November 2005, p. 18. 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