2. Corporate Personality

Question 1

What is Limited Liability?

Answer 1

Means that all debts incurred by a company are the company’s liabilities and are not the liabilities of the shareholders or the directors.

Question 2

What are the fidings from Saloman?

Answer 2

• a company is a different person from its members from incorporation so it is the company liable for debts incurred
• in the absence of fraud, the motive of incorporators are irrelevant
• one-man companies can benefit from limited liability
• the court found in favour of Salomon

Question 3

Are shareholders liable to pay company debts?

Answer 3

shareholders are not liable to pay the debts which the company owes to it’s creditors - it is the obligation of the company (usually through a contract).

Question 4

Can creditors pursue claims against the shareholders?

Answer 4

if the company has insufficient funds to meet it’s liabilities, creditors cannot pursue their claims against the shareholders.

Question 5

Wha is shareholders liability when a company becomes insolvent?

Answer 5

• if a company becomes insolvent, then the shareholders will be liable to lose the money that they have invested in subscribing for shares.
  • they may also be liable for the payment of any shares that are not fully paid for.

Question 6

What is the significance of limited liability?

Answer 6

• passive investment - shareholders know they can invest in a company knowing that their personal assets are safe and that they do not need to take an active role in management.
• why many entrepreneurs conduct business through the medium of a company
• why groups of companies have emerged - riskier business options can be conducted through different companies without the companies become vulnerable to creditors

Question 7

What is separate legal personality?

Answer 7

• directors owe their duties to the company, not the shareholders
• shareholders have rights against the company rather than against the directors
• third parties do business with the company directly, even though they negotiate with the directors.

Question 8

What are the consequences of a company as an independent legal person?

Answer 8

1. The company owns its own property (Macaura v Northern Assurance Co)
2. The company enters into its own contracts (Lee v Lee’s Air Farming Ltd)
3. The company sues and is sued on its own liabilities (Adams v Cape Industries plc)

Question 9

What is the significance of s16 CA 2006?

Answer 9

a company becomes a legal person from the date of incorporation.

Question 10

Will a company continue to exist if the director and shareholders change?

Answer 10

Yes, under CA 2006, a plc can be formed with just one director and one shareholder - the company will continue to exist even after these change.

Question 11

Advantage of separate legal personality?

Answer 11

• Encourages investment and businesses to take risks which generates money and benefits the wider community
• Creditors will be aware they are contracting with a limited company
• Creditors can asses financial vulnerability as they can check CH

Question 12

Disadvantage of separate legal personality?

Answer 12

Creditors are at risk of not receiving money as accounts are filed annually so may not be a current accurate representation

Question 13

What is does piercing the corporate veil refer to?

Answer 13

piercing/lifting the veil refers to situations where the courts may go behind the corporate framework and the company’s separate legal personality to make the shareholders of a company liable. this is an exception to the rule that shareholders’ liability is limited to any unpaid amount owning on their shares.

Question 14

When might the court pierce the veil?

Answer 14

The court may pierce the veil only where a person under an existing legal obligation or restriction deliberately evades or frustrates that obligation or restriction by setting up a company.

Question 15

What are the facts of Prest v Petrodel?

Answer 15

Courts will look behind the separate legal personality in two scenarios

Concealment principle and evasion principle

If there is an alternative legal remedy then the piercing the veil will not be needed.

• Prest: Properties were ordered to be sold to his wife

Question 16

What is the concealment principle?

Answer 16

Does not involve piercing the veil - cases when the corporate structure conceals the real actors - courts looks behind structure to reveal facts

Question 17

What is the evasion principle?

Answer 17

The court may pierce the corporate veil if a person deliberately attempts to evade an existing
legal obligation he is under by interposing a company which he controls

(Gilford Motor Co Ltd v Horne)

Question 18

Application of Statute for finding liability

Answer 18

1. Taxation: tax legislation recognises that group structures need to be treated differently for disclosure and financial reporting purposes. s 399 CA 2006 and s 409.
2. Employment: Employment Rights Act 1996 protects employees’ statutory rights when transferred from one company to another within a group, maintaining a continuous employment.
3. Corporate Insolvency: ss 213-215 Insolvency Act 1986 provides offences of fraudulent trading and wrongful trading where those involved in a company may be liable to contribute to the debts of an insolvent company.

Question 19

Common Law methods of finding liability

Answer 19

• Facade or Sham (Gilford Motor co Ltd v Horne) (Jones v Lipman) (Trustor AB v Smallbone (No 2))
• Single Economic Entity (Adams v Cape)(DHN Food Distributors v Tower Hamlets)
• Agency - liability based on law of agency, not lifting the veil
• Tort - liability on tort, not lifting the veil (VTB Capital v Nutritek)(Preset v Petrodel)(Chandler v Cape)

Question 20

What is the law of agency?

Answer 20

• possible that a company may act as an agent for its parent company or shareholder, and therefore the parent company may be found liable - there is no presumption that this is the case
• cases will turn on their facts and are based on the common law of agency - not the doctrine of lifting the corporate veil.
• The House of Lords judgment in Salomon considered and expressly disregarded this ground on the facts of this case.

Question 21

What is an agent?

Answer 21

a person who has been legally empowered to act on behalf of another person or an entity.

Question 22

How often is the principle of piercing the corporate veil invoked?

Answer 22

• Extremely rare that the principle will be invoked
• Where other routes to infer liability exist, such are tortious liability or the law of trust and agency, the court will infer liability on these principles.