Company Flashcards
(18 cards)
Salomon v Salomon
Q in this case was whether it was contrary to intention & meaning of Companies Act for a sole trader, in order to benefit from LL, to sell his business to a limited company which consisted only of himself and 6 members of his family.
S carried on leather business as a sole trader; incorporated a company for purpose of transferring sole trader-ship to the company. Salomon Ltd agreed to purchase business for 39,000 GBP. Company paid for business w/ loan for 10,000 GBP on debentures, 20,000 GBP paid by S himself (in return for 20,000 shares of business) and rest of price was paid in cash.
20,001 shares in Salomon Ltd were held by S. Wife + 5 children each owned 1 share each – at time, Companies Act said there had to be min of 7 shareholders.
Business went bust and went into liquidation. There was sufficient amount of money left in company to pay off 10,000 GBP loan, but there were no other funds to pay all the other creditors. Liquidator of company then claimed that company was entitled to indemnity of the debts for S, b/c company was merely an alias for S himself.
In HoL, rejected this claim. HoL said incorporation of company will be valid wherever formalities required in Companies Act are satisfied. Ct will not enquire into the nature of the business of the company. Ct will only depart from this principle in very exceptional circumstances. Is example of literal interpretation of statute, but there is economic aspect to what was said, e.g. considerations of social desirability.
Lee & Lee’s Air Farming Ltd
PC answered q as to whether governing director & shareholder of company could also be employee of company for purposes of NZ Workers Compensation Act 1922: made employers liable in respect of any PI suffered by employees in course of employment
Lee incorporated company in NZ called LAF; carried aerial top-dressing business. Lee held 2999 of 3000 shares in company; appointed as only director. Lee, in personal capacity, entered contract w/ company for employment as pilot. Dies in airplane accident. Wife brought claim against company under Compensation Act, arguing Lee was employee of LAF and LAF was liable to pay compensation which would go to the wife on behalf of L.
Problem was whether Lee became a worker even though he employed himself. NZ Courts said no. BUT PC applying Salomon, said Lee was a worker. Company is one legal entity, Lee in personal capacity is another legal entity, thus L was validly an employee of the company.
Brumder Motornet Services and Repairs
C was sole shareholder & director of company called Motornet; was also employee of company. C severed a finger b/c of problem w/ hydraulic problem @ M’s garage. C sought compensation from company M b/c M failed to comply w/ health & safety rules; what he was really seeking was compensation from M’s insurer.
Problem was, M was basically seeking compensation b/c of his own negligence when, as director, he failed to introduce health & safety rules at M. At first instance, he succeeded w/ compensation, but had damages wiped out b/c of contributory negligence.
Insurer appealed to CoA; CoA changed the reasoning but did not change the outcome. CoA decided that lower court was wrong to wipe out damages entirely b/c of contributory negligence; although in principle, the claim applied, CoA defeated claim on different ground. In failing to ensure proper health & safety, C was in breach of duty as director he was undone by CL principle that person cannot profit from their own wrong-doing.
Thus, case showed that there are limits to the absurd consequences that could flow from strictly applying Salomon.
Macaura v Northern Assurance Company
Company property belongs to the company, not the members.
Sometimes there can be negative consequences associated w/ separate legal personality. Q was whether C had insurable interest in timber, held by company where C held all the shares. Individual can only take out insurance policy on property in which he has insurable interest; must derive some form of benefit, financial or otherwise, on the property which is subject of insurance policy.
C incorporated company, in consideration for receiving shares in company, C transferred title to timber. At all times, timber remained on C’s land. C took out insurance policy against timber being destroyed by fire; timber was destroyed by fire and C tried to claim insurance. Insurance company argued that C’s timber was not insurable b/c it was owned by company.
HoL held there are only 2 conceivable ways in which C could have insurable interest in timber. Either he could have interest as shareholder of company, or he could have interest as creditor of company b/c he had lent money to company.
Ct was clear that he had no interest in timber as creditor of company; option was ruled out. Could he have interest as shareholder? HoL held no. Property of company is not property of shareholders
Creasey v Breachwood Motors Ltd
Veil was set aside, on basis that court believed it was just to do so.
Claim by general manager of Welwyn, which was a subsidiary of Motors, for wrongful dismissal, against Welwyn. Succeeded. Unfortunately, before judgment was entered, Welwyn ceased to carry on its business. All assets transferred to Motors. Claimant was left w/ claim against empty shell. C then sought leave of court to enforce judgment against Motors. Ct believed it was just to pierce veil and to enforce judgment against parent company.
BUT Ct in Creasey was clearly breaching CoA authority in earlier case of Adams v. Cape Industries
DHN Food Distributors v Tower Hamlets LBC
It was suggested by Lord Denning, in corporate group context, that it was possible to pierce corporate veil where the group functioned as a single economic unit. This was a DENNING SPECIAL, there was no previous basis that this could be done.
Woolfson v Strathclyde Regional Council
HoL disapproved of DHN reasoning; rejected idea that group of companies w/ interdependent r-ship can be treated as single economic unit. BUT was a Scottish case
Adams v Cape Industries
“There is no general principle that all companies in a group of companies are to be regarded as one. On the contrary, the fundamental principle is that “each company in a group of companies (a relatively modern concept) is a separate legal entity possessed of separate legal rights and liabilities:” The Albazero [1977] , per Roskill L.J.”
Case concerned US tort judgment against UK company. Employees sought to enforce tort judgment that was against US tort judgment against the UK company. Had to show that UK company was present in the jurisdiction of the US. One way to establish this was to find that the subsidiary (US company) and parent company (UK company) were one and the same thing. Ct took contractual approach to seeing as to whether there was agent r-ship: looked to see if there was an agency contract/agreement between parent & subsidiary companies.
Gilford Motor Co. Ltd v Horne
Mr Horne had been managing director of Gilford Motor. Contract of employment w/ Gilford Motor, precluded Mr Horne from engaging in competing business w/in specified geographical area for 5 years. Horne left business; carried competing business w/in area. Initially he carried it in his own name, but then created company. Gilford brought claim against Horne for breaching restraint of trade clause. Ct found intention of Horne was to carry on business through company, and to escape liability from GM. At first instance, claim failed b/c restraint of trade clause was invalid.
On appeal, CoA found restraint of trade clause was valid. Agreed w/ 1st court that Horne had set up company merely to escape obligation. Granted injunction against Horne AND company to stop carrying on business in geographical area. Rights + obligations of Horne attached to the company as a separate legal entity. Regarded as classic case of lifting the veil b/c of sham.
Jones v Lipman
L had sold property to Jones for 5250 GBP. Before land was transferred, L rethought deal. Sold to company for 3000 GBP in order to make it impossible for Jones to ask for order of specific performance. Judge found that the company was wholly owned & controlled by Lipman, and that property was transferred to company merely for purpose of evading L’s legal obligation to J. Another case of lifting the veil b/c of sham.
Gencor ACP Ltd v Dalby
Dalby was causing company’s money to be transferred to 3rd company, but 3rd company receiving Gencor’s money was wholly owned by Dalby. Case was brought against Dalby for breaching fiduciary duties. Ct held: D was liable to pay money back, and so was his company, b/c of breach of fiduciary duty.
Ct treated D & Company as same; thus believed it was piercing corporate veil.
BUT Sumption disagreed; what happened was concealment principle. All court was doing was looking at reality of situation; realised that the company was wholly owned by Dalby; clearly Dalby AND company was taking money in breach of fiduciary duty. Don’t need to say that D & company are same thing; no need to pierce the veil.
Trustor AB v Smallbone (No 2)
S was managing director of company; in breach of duties, S transferred monies to another company which was wholly owned by him. In proceedings for relief, T contended it was appropriate to pierce corporate veil, and to treat receipt of money by 3rd company TO BE THE SAME AS S receiving money. In judgment, court believed it was piercing the veil.
BUT Sumption said no. Piercing veil wasn’t appropriate remedy; it was just a case of concealment. Money had been received by company which was owned by S; S knew he was breaching fiduciary duty, and company knew that receiving money would be wrong; so both are liable on equitable duties; no need to pierce corporate veil b/c evasion principle didn’t apply: company existed before S had incurred legal obligation
Re FG (Films) Ltd
Concerned q of whether company, making film, was UK company, for purpose of obtaining various tax breaks. Company claimed to be maker of film, had obtained rights of making film from US company: the UK company had 100 GBP, 100 shares, 3 directors, American director held 90 shares and 2 other British directors held 10% between them. Had no staff, no registered office in UK. Ct held: UK company was just a front; British company was merely an agent for the US company. Emphasis of the court was whether the British company had a GENUINE, INDEPENDENT interest; were looking at the SUBSTANCE of the company.
Smith Stone & Knight v Birmingham Corporation
Company owned land; company also had subsidiary company. Company which owned land did not carry out business on land; subsidiary company carried out the business. Land was compulsorily purchased; usually, there would be compensation for value of land + extra compensation for carrying out business on land. But Birmingham Corporation refused b/c subsidiary was the one who was carrying out business. Smith argued that subsidiary was their agent; agency was found on the facts. Again, Court was looking at quality of the companies – whether subsidiary was carrying out its own business or parents’ business. ESSENTIAL Q WAS: did company do anything for itself?
Prest v. Petrodel Resources
husband & wife were getting divorced; husband was sole shareholder of X company, which was owner of 7 residential properties. In initial proceedings for ancillary relief, judge concluded that husband was entitled to possession of properties for purposes of Matrimonial Causes Act, despite properties were held by company. Thus, properties could be transferred to wife.
Q on appeal was whether Ct indeed had power to order transfer of properties, held by company, to wife, i.e. pierce corporate veil.
3 possible legal bases on which properties could be transferred to wife:
1. Common law piercing the veil, if company is sham/façade
2. MCA 1973 special basis for piercing veil: DISMISSED
3. Properties were held on trust for husband
What was outcome of Prest? Veil could not be pierced b/c evasion principle did not apply; BUT UKSC still achieved the same effect b/c they held: companies held properties on trust for husband; and thus they fell w/in scope of MCA 1973.
Williams v Natural Life Health Foods
Instead of seeking to ‘pierce the corporate veil’ litigants can sometimes achieve much the same effect by establishing primary liability on the part of those who manage or control a company for loss suffered as a result of corporate actions.
Natural Life was limited company which had been set up by managing director & principal shareholder M, to franchise out shop business. Claimant approached company, was given details about financial projections, to which M had paid substantial contribution to set up these financial projections. Claimants had no direct dealings w/ M, always dealt w/ company. Pre-contractual negotiations were carried out by employee of Natural Life. C began franchise but incurred big losses; brought claim against M for misstatement of financial projections. C then tried to join M as a co-defendant. After that, NL was dissolved as company, and action was pursued against M alone.
The fact that shareholder owned & controlled company and had contributed to contents of brochure was not enough to make him personally liable, esp. because there were no personal dealings between shareholders & claimants. BUT if there was evid that shareholder had assumed personal liability, Ct, in principle, would have allowed C to claim against M.
Standard Chartered v Pakistan Shipping Corp
Attempt of director, accused of fraudulent misrep, to say that when he said misrepresenting statements, he was talking on behalf of company, as its mouthpiece. HoL accepted this reasoning; if he was speaking on behalf of company, he would not be personally liable for the consequences of his statements. BUT HoL said this did not apply to fraud.
Chandler v Cape plc
Another case dealing w/ assumption of responsibility principle. Ct considered when parent company (Cape) could assume responsibility in tort towards tort victims of its subsidiaries. Subsidiary company had negligently exposed victims to asbestos. But subsidiary was then dissolved. Claimant tried to argue that parent had assumed responsibility to the tort victims and therefore parent company would be liable as principal tortfeasor.
At first instance, judge held company indeed owed DoC on common law principles.
Case was appealed, in CoA, judge set out circumstances where parent company would be responsible for health & safety of its subsidiary’s employees:
“[80] In summary, this case demonstrates that in appropriate circumstances the law may impose on a parent company responsibility for the health and safety of its subsidiary’s employees. Those circumstances include a situation where, as in the present case, (1) the businesses of the parent and subsidiary are in a relevant respect the same; (2) the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry; (3) the subsidiary’s system of work is unsafe as the parent company knew, or ought to have known; and (4) the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees’ protection. For the purposes of (4) it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely. The court may find that element (4) is established where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues.”
