Company law Flashcards
Lectures 09-18 (62 cards)
1
Q
Gas Lighting Improvement Co Ltd v Commissioners of Inland Revenue
A
- “Between the investor, who participates as a shareholder, and the undertaking carried on, the law interposes another person, real though artificial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the shareholders”
2
Q
Trustees of Dartmouth College v Woodward
A
- Although a company is a person, it has no physical existence, it is “an artificial being, invisible, intangible, and existing only in operation of law”
3
Q
Lee v Lee’s Air Farming Ltd
A
- The company is liable to enter into contracts with those outside and within the company
4
Q
Salomon v Salomon & Co Ltd
A
- Salomon was a sole trader engaged in the business of boot-making
- He decided to incorporate the business and, to that end, he created a company, A. Salomon & Co Ltd, and sold the boot-making business to this newly created company in return for £39,000
- This payment came via
i. 20,000 £1 shares
ii. £10,000 worth of debentures (written acknowledgments of indebtedness), secured by a floating charge over all the assets of the company
iii. The balance in cash - Legislation at the time (Companies Act 1862) required that a company have a minimum of seven members
- Accordingly, the company’s shares were divided up, with Salomon owning the majority and his wife and 5 children each holding one share
- Shortly after, the business failed and went into liquidation
- The company owed money to several creditors, including Salomon himself (the £10,000 in debentures)
- As Salomon had secured his loan (via a floating charge), he enforced this and claimed the £10,000 that he was owed
- Unfortunately, this meant that there were no more assets to pay the other creditors, whose debts were unsecured
- The liquidator raised an action against Salomon personally on the grounds that
i. The company was not set up properly (the creditors believed that Salomon’s arrangements with his family (himself the majority shareholder and his wife and five children owning one share each) were an abuse of the rules relating to incorporation)
ii. The debentures in Salomon’s favour should be rescinded on the grounds of fraud
iii. The contract for the sale of Salomon’s business to the company should be rescinded since the value of the business had been overstated - The purpose of the litigation was to make Salomon liable to the creditors
- At first instance, Vaughan Williams J held that the company was Salomon’s agent and that he was therefore liable for its debts
13 The Court of Appeal held that the company acted as a trustee for Salomon and he should be held liable for its debts - Lopes LJ
i. “The Act contemplated the incorporation of seven independent bona fide members, who had a mind and a will of their own, and were not the mere puppets of an individual who, adopting the machinery of the Act, carried on his old business in the same way as before, when he was a sole trader” - Lindley LJ
i. By appointing six “dummy” shareholders, the company had been formed “contrary to the true intent and meaning of the Companies Act 1862” and that therefore, it was a “sham” and a “device to defraud creditors”
16 House of Lords: Lord Herschell
i. “A company may in every sense be said to carry on business for and on behalf of its shareholders; but this certainly does not in point of law constitute the relation of principal and agent between them or render the shareholders liable to indemnify the company against debts which it incurs - The House of Lords adopted a much more literal approach to interpreting the Companies Act 1862
i. “There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any one of them should take a substantial interest in the undertaking, or that they should have a mind and will of their own”
ii. “The company attains maturity on its birth. There is no period of minority, no interval of incapacity. I cannot understand how a body corporate thus made capable’ by statute can lose its individuality by issuing the bulk of its capital to one person” - The fact that the company was effectively controlled by one person was not a reason to ignore the company’s separate personality
- Salomon had complied fully with the requirements for incorporation and therefore the company was liable for its debts, and not Salomon himself
- Lord MacNaghten
i. “The company is at law a different person altogether from the subscribers to the memorandum … the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act”
5
Q
Gilford Motor Co Ltd v Horne
A
- Horne was the managing director of Gilford Motor Co Ltd
- His employment contract contained a restrictive covenant that provided that, upon leaving Gilford’s employment, he would not attempt to solicit any of its customers
- Horne’s contract was terminated, but he convinced his wife to set up a company in her name, which was actually under his control
- This new company competed directly with Gilford
- Gilford sought an injunction to enforce the restrictive covenant and prevent the new company from soliciting its customers
- Horne argued that the covenant was binding on him only, not on the new company
- Lord Hanworth MR
i. The new company was “formed as a device, a stratagem, in order to mask the effective carrying on of a business of Horne”
ii. Injunction was granted
6
Q
DHN Food Distributors Ltd v Tower Hamlets London Borough Council
A
- DHN Food Distributors was a holding company that included two other wholly owned subsidiaries
- One subsidiary, Bronze Investments Ltd, did not carry on any business activity but it did own the land upon which DHN carried out business
- The local authority compulsorily purchased this land and £360,000 was paid to Bronze, as the owner of the land
- DHN could not find alternative premises, so all three companies went into liquidation, thereby entitling the holder of a legal or equitable interest in the land to receive compensation for disturbance to the business
- DHN argued that it was entitled to such compensation
- The local authority argued that Bronze Investments owned the land, that Bronze’s business had not been disturbed, and that DHN was not entitled to any compensation for disturbance because it had no legal or equitable interest in the land
- DHN was entitled to compensation for the disturbance to the business that the compulsory purchase caused
- Lord Denning MR
i. “The subsidiaries are bound hand and foot to the parent company and must do just what the parent company says … This group is virtually the same as a partnership where all the three companies are partners … The three companies should, for present purposes, be treated as one, and the parent company, DHN, should be treated as that one” - The companies were so closely intertwined that it would have required a simple transfer of the legal title of a piece of land from one company within the group to another to enable certain compensation payments to be paid by the council to DHN
- There was no suggestion of fraud or deceit involved in this case; rather, this case established what was known, at the time, as the “group entity theory” which presupposed that a group of company all closely connected might be presumed to be one greater whole
7
Q
Smith, Stone and Knight Ltd v Birmingham Corporation
A
- Smith, Stone and Knight Ltd manufactured paper
- It acquired a partnership that was involved in the waste paper business
- SSK set up a subsidiary company to run this waste paper business, but never transferred ownership of the business to the subsidiary
- SSK also retained ownership of the land upon which the subsidiary operated
- This land was compulsorily purchased by Birmingham Corporation, who planned to pay the subsidiary compensation for the loss of the land and the disturbance caused to the business
- SSK contended that it was entitled to the compensation, not the subsidiary
- The subsidiary was the agent of SSK and, as such, SSK recovered the compensation
- The crucial factor in the Court’s decision was the level of domination that SSK exhibited over the subsidiary
- SSK owned the subsidiary’s business, the land upon which it conducted business, and it also owned 497 of the subsidiary’s 502 shares
- However, this approach has since lapsed because it may now be acceptable to make a company the agent for its shareholders if that is something specifically agreed between the parties
8
Q
Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd
A
- WWI case
- Daimler was due to pay Continental a large sum of money
- Daimler successfully contended that as a matter of public policy, the courts should look behind the registration of Continental (the corporate veil) to see the company’s underlying predominantly German ownership and management
- Continental should be treated as having “enemy character”, and that therefore, the debt should cease to exist
- As far as a company is concerned, enemy character could be established by looking at who controlled it, in this case Germans
- Thus, Continental was not able to claim its debt
9
Q
Re Southard Co Ltd
A
- In principle, the separate legal personalities of a holding company’s subsidiaries serve to protect the holding company from being liable for its subsidiaries’ debts
- “A parent company may spawn a number of subsidiary companies, all controlled directly or indirectly by the shareholders of the parent company
- If one of the subsidiary companies, to change the metaphor, turns out to be the runt of the litter, and declines into insolvency to the dismay of the creditors, the parent company and the other subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary”
- Should the subsidiaries become insolvent, their respective corporate veils may not be pierced to make the holding company responsible for the subsidiaries’ debts
10
Q
Adams v Cape Industries plc
A
- A corporate group was engaged in the mining and selling of asbestos
- The parent company, Cape Industries plc was based in England
- The asbestos was mined by a subsidiary company based in South Africa, and was marketed and sold by two other subsidiaries, namely NAAC (based in Illinois, US) and Capasco (based in England)
- The asbestos was sold to a factory in Texas, the employees of which subsequently developed medical conditions caused by exposure to asbestos
- Several actions were initiated against Cape, Capasco, and NAAC, and were settled out of court for around $20 million
- Cape then decided to put NAAC into liquidation and a new company (CPC) was set up to continue NAAC’s work
- This new company was not a subsidiary of Cape, but did receive financial support from Cape
- A further 206 claimants from the Texas factory initiated proceedings against Cape and Capasco, and a US court ordered that damages of around $15 million be paid
- The claimants therefore sought to enforce the judgment in the UK against Cape and Capasco
- The only way in which this could be achieved was if these companies were held to be present in the US
- The claimants argued that Cape and Capasco were present in the US through their subsidiaries, NAAC and CPC
- For this argument to succeed, the separate corporate personalities of each company would need to be disregarded and Cape, Capasco, and NAAC/CPC treated as one entity
- In this case, the claimants put forward four arguments in favour of disregarding Cape’s corporate personality
i. The company was a fraud or a sham
ii. A relationship of agency existed between Cape and its subsidiaries
iii. Cape and its subsidiaries should be treated as a “single economic unit”
iv. Cape’s corporate personality should be disregarded in the interests of justice - The Court of Appeal strongly reaffirmed the principle in Salomon
- The US subsidiaries were separate and distinct from their English parent
- Accordingly, Cape and Capasco were not present in the US, and so the US judgment could not be enforced against them
- The reason why Cape had created subsidiaries in the US was to that liability would fall on those subsidiaries
- Salomon recognised that this was a valid use of the company and nothing in the case convinced the Court that the principle in Salomon should not be followed
11
Q
Prest v Petrodel
A
- The case involved a divorce settlement between Mr and Mrs Prest
- The High Court had awarded Mrs Prest a settlement totalling £17.5 million but much of Mr Prest’s assets were tied up in companies solely owned and controlled by him
- Section 24(1)(a) of the Matrimonial Causes Act 1973 grants courts the power to “order that a party to the marriage shall transfer to the other party … property to which the first mentioned party is entitled”
- The High Court utilised this power to disregard the corporate personalities of these companies and order the relevant properties to be transferred to Mrs Prest
- Mr Prest appealed, questioning whether the Court had the power to do this, given that the properties did not belong to Mr Prest, but to his companies
- The Court of Appeal, in allowing Mr Prest’s appeal, held that the companies’ corporate personalities could not be disregarded in these circumstances and so the High Court had no jurisdiction to make the order under section 24(1)(a)
- Mrs Prest appealed
- The appeal was unanimously allowed, but not on the ground that the companies’ corporate personalities could be disregarded
- The Supreme Court held that the properties were held on trust by the companies for the benefit of Mr Prest and, as such, they could form part of the divorce settlement
- More importantly, the Court unanimously refused to disregard the corporate veil and stated that there was only one instance in which the courts could disregard the veil namely where
i. “A person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control” - Further, a court could only disregard the veil in this instance if “all other, more conventional, remedies have proved to be no assistance”
12 Many of the cases discussed above involving corporate personality must no longer be regarded as examples of instances where corporate personality was disregarded
12
Q
Evasion principle
A
- Only instance where the corporate veil can be pierced
- “Where a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control”
- The court may “pierce the corporate veil … only for the purpose of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality”
13
Q
Three conditions for the corporate veil to be pierced under the evasion principle
A
- There must be an existing legal obligation, liability, or restriction placed on a person within a company (for an example where an obligation is not placed under the person within the company but someone else)
- The person must interpose a company in order to evade or frustrate the obligation or liability
- The company interposed must be under the person’s control
14
Q
Borland’s Trustee v Steel Bros & Co Ltd
A
- “A share is the interest of a shareholder in the company measured by a sum of money, for the purposes of liability in the first place, and of interest in the second”
- It basically represents a shareholder’s stake in a company
- It also provides a source of income through the distribution of dividends and capital growth through increase in the market value of shares
15
Q
Re Smith and Fawcett Ltd
A
- If the articles allow directors to refuse to register transfers, provided they have not acted in bad faith, they are entitled to do so
16
Q
Trevor v Whitworth
A
- The creditors will expect capital to rise and fall in the course of trading, but will not expect the company to return capital to the shareholders
16
Q
Scottish Insurance Corporation Ltd v Wilsons & Clyde Coal Ltd
A
- The interests of shareholders are also taken into account and the court will aim to determine whether the reduction would be fair and equitable between different classes of shareholders and between shareholders of the same class
17
Q
Trevor v Whitworth
A
- The common law absolutely prohibited companies from purchasing their own existing shares as this would involve returning capital to the shareholders and would therefore reduce the funds available to pay the creditors
18
Q
Heald v O’Connor
A
- An agreement to provide unlawful financial assistance will be generally unenforceable
19
Q
Belmont Finance Corp v Williams Furniture Ltd (No 2)
A
- The recipient of the assistance will also be required to account for the sum received if they knew of the impropriety of the transaction
20
Q
Re Hill and Tyler Ltd (In Administration)
A
- A loan or security granted to provide “financial assistance” is “unenforceable”
21
Q
Ultraframe (UK) Ltd v Fielding
A
- Section 251 refers to directors acting on the directors/instructions, the mere giving of instructions will not make a person a shadow director
- For a person to be a shadow director, it must be shown that a “governing majority of the board” was accustomed to acting on their instructions
22
Q
Re Unisoft Group Ltd (No 3)
A
- The directors must be “accustomed” to acting on the instructions. Therefore, a person will not be a shadow director the first time such instructions are acted upon, the directors must act on the instructions “over a period of time and as a regular course of conduct”
23
Q
Automatic Self-Cleansing Filter Syndicate Co v Cuninghame
A
- Where directors were not obliged to comply with a resolution of the shareholders directing a sale of the business
24
Percival v Wright
1. The common law has long established that the directors owe their duties to the company only
25
BTI 2014 LLC v Sequana SA
1. Duties are owed by a director of a company to the company and they are owed to (and can be enforced by) the company only and not anyone else
26
Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd
1. A director of a company does not owe duties to the members of the company
27
Western Finance Co Ltd v Tasker Enterprises Ltd
1. A director of a company does not owe duties to its creditors, present or future
28
Brant Investments Ltd v KeepRite Inc
1. A director of a company does not owe duties to fellow directors
29
29
Re Coalport China Co
1. A purpose outside this scope is usually known as an ‘improper purpose’, and the burden of proof for establishing that a purpose is improper is placed upon the claimant
30
Grant v United Kingdom Switchback Railways Co
1. At common law, liability for breach of section 171(a) can be avoided if the members ratify the breach by passing an ordinary resolution
31
Hogg v Cramphorn Ltd
1. The director may be required to account for any gains made or compensate the company for any loss sustained (Extrasure Travel Insurances Ltd v Scattergood), unless the members ratify the breach of duty
32
Howard Smith Ltd v Ampol Petroleum Ltd
1. Any agreement entered into by a director in breach of section 171(b) is voidable at the company’s instance
33
Regentcrest plc v Cohen
1. The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently
2. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company
3. The issue is as to the director’s state of mind
34
CAS (Nominees) Ltd v Nottingham Forest plc
1. The courts have not sought to place strict parameters on what a benefit is, and have even acknowledged that shares are often purchased for non-financial motives, meaning that directors may be acting in the company’s interests even if their actions cause the share price to decrease
35
Re BSB Holdings Ltd (No 2)
1. Case law appears to say is that where the interests of the company and part of its membership conflict, preference should be given to the interests of the company
36
Movitex Ltd v Bulfield
1. A director entering into a contract with their company
37
Gwembe Valley Development Co Ltd v Koshy
1. Company A and company B propose to contract, but a director of company A is a director or shareholder of company B
38
Rolled Steel Products (Holdings) Ltd v British Steel Corp
1. A director of company X executes a personal guarantee in favour of company Y for the debts of company X
39
Foss v Harbottle
1. Foss and Turton were shareholders in the Victoria Park Company (‘VPC’)
2. They claimed that the directors of VPC (one of whom was Harbottle) had, in breach of duty, caused VPC to enter into a series of fraudulent transactions
3. Accordingly, Foss and Turton commenced proceedings ‘on behalf of themselves and all the other members of the corporation, except those who committed the injuries complained of’
4. Wigram VC stated: “VPC ‘is an incorporated body, and the conduct with which the Defendants are charged in this suit is an injury not to the Plaintiffs exclusively; it is an injury to the whole corporation”
5. Foss and Turton had assumed the right to sue on behalf of VPC, but “it was not, nor could it successfully be, argued that it was a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation”
6. In the circumstances, there was nothing to prevent VPC itself from obtaining redress, so the claim failed
40
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)
1. “A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested”
41
Macdougall v Gardiner
1. “If the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes”
42
Iesini v Westrip Holdings Ltd
1. Establishing a prima facie case “necessarily entails a decision that there is a prima facie case both that the company has a good cause of action and that the cause of action arises out of a directors’ default, breach of duty, and such”
43
Re Baltic Real Estate Ltd
1. Any member has standing to commence an unfair prejudice petition. Although section 994 was primarily designed for minority shareholders (and most petitions are brought by minority shareholders), a majority shareholder has standing to commence a petition, although the court may refuse to grant a remedy if the majority shareholder could use their majority shareholding to remedy the conduct themselves (for example by removing the directors)
44
Graham v Every
1. Ground (b) requires an act or omission of the company and therefore ‘the petitioner must identify something which the company does or fails to do’
45
Re Legal Costs Negotiators Ltd
1. Section 994 applies where ‘the company’s affairs’ are being conducted in an unfairly prejudicial manner
2. From this, it follows that a section 994 petition will fail if it is brought against a respondent who is acting in a private capacity (in relation to their own affairs, and not those of the company)
46
Re Home & Office Fire Extinguishers Ltd
1. Two brothers, Simon and Guy, were the only directors and members of Home and Office Fire Extinguishers Ltd (‘HOFE’)
2. Simon asked Guy for an advance on his salary, but Guy refused, as HOFE was struggling financially
3. A dispute resulted in a physical altercation between the brothers, with each alleging that the other attacked him with a hammer
4. Simon was charged with intent to cause grievous bodily harm and was prohibited from going near HOFE’s offices
5. Guy purported to terminate Simon’s employment
6. Simon was subsequently acquitted
7. Each commenced a section 994 petition against the other, seeking an order compelling the other to sell his shares
8. Nicholas Strauss QC held that, based on the evidence, Simon had initiated the attack
9. He went on to state that Simon’s conduct related to the affairs of HOFE because his conduct ‘was a breach of the implied understanding that he and Guy, would act properly and in good faith towards each other, and it was also a single event which made it impossible for them to continue their association as directors of, and shareholders in, the Company’ and it was ‘essentially a reaction to a decision taken by Guy concerning the Company’s finances’
10. Accordingly, Simon was ordered to sell his shares to Guy
47
Re Bovey Hotel Ventures Ltd (Ch)
1. “It is not necessary for the petitioner to show that the persons who have de facto control of the company have acted as they did in the conscious knowledge that this was unfair to the petitioner or that they were acting in bad faith; the test, I think, is whether a reasonable bystander observing the consequences of their conduct, would regard it as having unfairly prejudiced the petitioner’s interests”
48
Re Saul D Harrison and Sons plc
1. Courts have not applied a limited interpretation of the words ‘unfairly prejudicial’, and have stated that “the words ‘unfairly prejudicial’ are general words and they should be applied flexibly to meet the circumstances of the particular case”
49
Re Saul D Harrison and Sons plc
1. However, conduct complained of “must be both prejudicial (in the sense of causing prejudice or harm to the relevant interest) and also unfairly so: conduct may be unfair without being prejudicial or prejudicial without being unfair, and it is not sufficient if the conduct only satisfies one of these tests”
50
Re Unisoft Group Ltd (No 3)
1 It has been stated that “the requirement of prejudice means that the conduct must be shown to have done the members harm and I believe harm in a commercial sense, not in a merely emotional sense”
51
Re Elgindata Ltd
1. The general rule is that mismanagement will normally not amount to unfair prejudice
52
Re Little Olympian Each Ways Ltd (No 3)
1. Where the directors of a company sell that company’s assets at an undervalue to another company they control
53
Re London School of Electronics Ltd
1. Where the directors of company X and company Y transfer business from company X to company Y in order to reduce the profits distributed to shareholders in company X
54
Re a Company (No 008699 of 1985)
1. Where the directors urge the members to accept a takeover bid from a company in which they have a favourable interest, whilst misleading the members into rejecting a more favourable rival bid
55
Irvine v Irvine (No 1)
1. Where the directors pay themselves excessive remuneration (Re a Company (No 002612 of 1984) [1986] 2 BCC 99,453 (CA)) or remuneration paid in breach of the company’s articles
56
Grace v Biagioli
1. Where the directors and majority shareholders decide not to pay out a declared dividend and instead distribute the profits to themselves as management fees
57
Re a Company (No 00789 of 1987)
1. Breach of certain statutory rights or constitutional provisions may amount to unfairly prejudicial conduct
58
Re Saul D Harrison & Sons plc
1. However, it is important to note that “trivial and technical infringements” are not intended to give rise to an unfair prejudice petition
59
Re a Company (No 00477 of 1986)
1. It is important to note that a member’s interests are wider than a member’s rights
60
Re Sam Weller & Sons Ltd
1. Members may have different interests, even if their rights as members are the same
