Word limit 1500 Question With reference to appropriate statutory and common law examples critically evaluate how company law has sought to protect against the abuse of limited liability

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Word limit 1500 Question With reference to appropriate statutory and common law examples critically evaluate how company law has sought to protect against the abuse of limited liability. Law Assessment Criteria FAIL 3rd 2:2 2:1 FIRST LESS THAN 40% 40-49% 50-59% 60-69% 70+ % KNOWLEDGE Insufficient details of relevant law < 40% Some basic detail of relevant law 40-49% Good statement of relevant law 50-59% Clear statement of relevant law 60-69% Excellent statement of relevant law 70+ % APPLICATION Fails to identify key issues, poor or no attempt at application < 40% Identifies obvious issues only, weak application of law 40-49% Good coverage of obvious issues, reasonable application of law 50-59% Obvious and subtle issues dealt with, good application of law 60-69% Excellent coverage of issues, excellent application of law 70+ % EVALUATION Poor/no attempt at evaluation, critical judgment, or problem solving < 40% Weak evaluation, critical judgment and problem solving 40-49% Reasonable evaluation, critical judgment, and problem solving 50-59% Good evaluation, critical judgment, and problem solving 60-69% Excellent evaluation, critical judgment, and problem-solving 70+ % RESEARCH Very poor referencing, no research apparent < 40% Weak referencing, evidence of basic research only 40-49% Adequate referencing, evidence of some further research 50-59% Clear referencing, evidence of some detailed research 60-69% Excellent footnote referencing, bibliography, and research 70+ % COMMUNICATION Inadequate spelling, grammar, messy and careless presentation < 40% Significant errors in spelling, grammar, careless structure 40-49% Reasonable spelling and grammar, satisfactory presentation 50-59% Good spelling and grammar, well organised structure 60-69% Excellent spelling, grammar, structure, and presentation 70+ % Guidelines Based on Lectures 1,2 and 3 Cases you may use. You may also look for additional cases Creation and upholding the corporate veil ( Identify instances where Salomon’s decision was not upheld, if any Salomon v Salomon & Co [1897] AC 22 Re Hydrodam Ltd [1994] 2 BCLC 180 Lee v Lee’s Air Farming Ltd Tunstall v Steigman Macaura v Northern Assurance Ltd Prest v Petrodel Resources Ltd Cases of Piercing the Corporate veil Re Patrick & Lyon Ltd [1933] Ch 786 Re Continental Assurance Co [2001] BPIR 733 Re Produce Marketing Consortium (No 2) Re Purpoint Ltd [1991 BCLC 491 Gilford Motor Co Ltd v Horne [1933] Ch 935 Jones v Lipman [1962] WLR 832 (Re Southard & Co [1979] 1 WLR 1198 Smith Stone and Knight Ltd v Birmingham Corpn. DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852 Woolfson v Strathclyde Regional Council 1978 SC (HL) 90 Adams v Cape Industries plc [1990] Ch 433 Cases from Pre-incorporation contracts (another instance of looking beyond the corporate veil and identifying the promoters ) Kelner v Baxter (1866) LR 2 CP 174 Newborne v Sensolid (GB) Ltd [1954] 1 QB 45 Phonogram Ltd v Lane [1982] QB 938 Oshkosh B’gosh v Dan Marbel Inc Ltd [1989] BCLC507 Bagot Pneumatic Tyre Co v Clipper Pneumatic Tyre Co [1902] 1 Ch 146 Additional Reading Kevin Brewer Shareholder Primacy and the Trajectory of UK Corporate Governance, Armour, Deakin and Konzelmann Shareholder Primacy and the Distribution of Wealth’, Paddy Ireland (2005) 68 Modern Law Review 49 New Thinking on Shareholder Primacy’, Stout (2005) ‘The idea behind such companies is among humanity’s most ingenious inventions’ (Harari, Sapiens, 2014). N.M. Butler, 1911 speech called "Politics and Economics" to the 143rd Annual Banquet of the Chamber of Commerce of the State of New York in 1911 (pp. 43-55), and available through HathiTrust Digital Library. ‘Limited liability: a necessary revolution?’, 25 Company Lawyer 99 (2004) Tom Hadden, ‘Company Law and Capitalism’ Keay, ‘Wrongful trading and the liability of company directors: a theoretical perspective’, 25 Legal Stud. 431 2005 Cheng-Han, Wang, & Hofmann, ‘Piercing the Corporate Veil: Historical, Theoretical & Comparative Perspectives’, Berkeley Business Law Journal, Vol. 16, Issue 1. Hannigan, ‘Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company’, [2013] Irish Jurist 11 Outline Begin with different structures for business. A simple explanation on how companies differ from (partnership and the Sole proprietary businesses ) Incorporation (meaning ) Features of a company – emphasis is on the corporate veil and limited liability. Describe other features also Discuss Salomon, significance, and the additional reading on limited liability. Other cases where the court stuck with the decision and cases where the decision was not upheld. Advantages and disadvantages of limited liability (detailed discussion) When is the corporate veil pierced? Whether courts are eager to pierce the corporate veil Why or why not? All circumstances with case law (including preincorporation contracts) Conclude with your views on the ease with which limited liability is available CDDA in Lecture 2 Lecture 2 Company Law Limited Liability, and the Veil of Incorporation 1 6-May-21 Business Law and Ethics Limited Liability Re-cap • Business organisations; sole trader, partnerships, company • With the notion of limited liability comes the doctrine of corporate personality • The idea that the company is to be treated in law as an entity entirely separate from those who own it with its own rights and duties. • In this way it is the company which owes money, not the owners • It is the company which enters into contracts etc, not the owners • This has the effect of increasing stability: – the company can sue and be sued in its own right – the death of members has minimal impact – others deal with the company, rather than individuals 2 6-May-21 Business Law and Ethics Salomon v Salomon & Co [1897] AC 22 • The principle of corporate personality was established in Salomon • The principle established in Salomon that once incorporated a company becomes a separate legal entity has been confirmed on countless occasions. – – – – Lee v Lee’s Air Farming Ltd Tunstall v Steigman Macaura v Northern Assurance Ltd Prest v Petrodel Resources Ltd • It remains the single most influential case in company law • The foundation on which company law is based • An examination of the facts of Salomon illustrates the advantages and disadvantages of limited liability 3 6-May-21 Business Law and Ethics Salomon v Salomon & Co [1897] AC 22 • Salomon owned a boot & shoe business as a sole trader • He sold it to a company owned by himself and members of his family 4 6-May-21 Business Law and Ethics Salomon v Salomon & Co [1897] AC 22 • Salomon secured a debt on the company’s assets by means of a debenture when the company went into liquidation he claimed priority of payment over the other creditors The House of Lords upheld the principle of limited liability and corporate personality, i.e. Salomon was to be treated as entirely separate from the company This principle continues today and is at the heart of company ownership Creating the ‘veil of incorporation’ • • • • 5 6-May-21 Business Law and Ethics Confirming Salomon • The principle of separate corporate personality was subsequently confirmed in a range of cases. • Lee v Lee’s Air Farming illustrated the extent of the doctrine • Cases such as Tunstall v Steigmann and Macaura v Northern Assurance Ltd provided a reminder that the consequences of incorporation were not always beneficial. 6 6-May-21 Business Law and Ethics Lee v Lee’s Air Farming Ltd [1960] UKPC 33 Lee’s Air Farming Ltd Lee Controlling Shareholder (2999/3000 shares) Governing Director Lee Chief Pilot 7 6-May-21 6-May-21 Business Law and Ethics • Mr Lee died in a plane crash • Mrs Lee sought compensation • Court of Appeal in New Zealand denied compensation on the basis that it would be incompatible for a worker to also be the employer Lee v Lee’s Air Farming Ltd [1960] UKPC 33 • The Judicial Committee of the Privy Council heard the appeal, and held that Mrs Lee was entitled to compensation. It confirmed that a company is a separate legal entity. A director could still be under a contract of employment with the company he solely owned. – “personal injury by accident arising out of and in the course of employment is caused to a worker, his employer shall be liable to pay compensation …” – A worker is “any person who has entered into or works under a contract of service… with an employer… whether remunerated by wages, salary or otherwise.” • 8 6-May-21 Business Law and Ethics Lifting the Corporate Veil 9 6-May-21 Business Law and Ethics Lifting the Corporate Veil • The concept of the ‘corporate veil’ is inherent in the doctrine of corporate personality • This flows from the acceptance of limited liability • BUT – Parliament and the courts have recognised a number of scenarios where the ‘veil’ will be ignored • i.e. where the assets of the company and the owners are treated as the same • Clearly this is most significant where the company is insolvent and creditors wish to pursue the assets of the owners 10 2-Feb-18 Business Law and Ethics Lifting the Corporate Veil • Given the significance of limited liability it is crucial to understand the circumstances which could possibly lead to avoidance of the ‘veil’ • In all cases the basic principle is the same - To avoid the ‘veil’ being used to perpetrate an iniquity • ‘Lifting the veil’ arises through the common law and statute • Many such cases do not actually remove the ‘veil’ but merely recognise/impose a personal liability on certain individuals • In such cases the company remains a separate entity but there is not the usual strict separation envisaged in the case of Salomon 11 2-Feb-18 Business Law and Ethics Statutory provisions • Fraudulent and wrongful trading principles are long established, and are now found in the Insolvency Act 1986 Insolvency Act 1986, s. 213 – fraudulent trading • applies to a person who has knowingly carried on a business with ‘intent to defraud’ or for a ‘fraudulent purpose’. This is also a criminal offence (s.993, CA 2006). • BUT – ‘fraud’ demands a high standard of proof and so is difficult to apply: – Re Patrick & Lyon Ltd [1933] Ch 786 – ‘actual dishonesty’, ‘real moral blame’. 12 2-Feb-18 Business Law and Ethics Statutory provisions Insolvency Act 1986, s. 214 – wrongful trading • applies to a person who knew or ought to have concluded that the company was insolvent and who did not take every step to minimise the loss to creditors • this does not require any evidence of fraud but can be hard on those seeking to save their company – Re Continental Assurance Co [2001] BPIR 733 ‘whether to close down and go into liquidation or to trade on and hope to turn the corner’ • This creates a dilemma for directors and cases are decided on their facts 13 2-Feb-18 Business Law and Ethics Statutory provisions Insolvency Act 1986, s. 214 – wrongful trading • Assessed on the basis of the level of knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions • That is the general knowledge, skill and experience that that director has • If the elements of wrongful trading are established, a director might be required to contribute to the assets of a company during its winding up proceedings, notwithstanding the principle of separate personality. 14 2-Feb-18 Business Law and Ethics Statutory provisions Insolvency Act 1986, s. 214 – wrongful trading • What level of liability? • Re Produce Marketing Consortium (No 2) – the amount by which the assets of the company had diminished due to the directors’ conduct – the purpose was compensatory – not penal • Re Purpoint Ltd [1991 BCLC 491 – contribution is to be made to the company’s general assets, not to one particular creditor • See Keay, ‘Wrongful trading and the liability of company directors: a theoretical perspective’, 25 Legal Stud. 431 2005 15 2-Feb-18 Business Law and Ethics Statutory provisions Company Directors Disqualification Act 1986 • Personal liability following a disqualification order • Aimed at preventing unfit persons from running companies, to prevent incompetence from causing repeated losses and to prevent abuse of limited liability • S. 1(d) – [a disqualified person shall not] ‘in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of any company’ • S. 15 – a person who contravenes a disqualification order is personally liable for the company’s debts 16 2-Feb-18 Business Law and Ethics Common Law Exceptions Sham/facade/‘puppet’ companies • Perhaps the most straightforward category • Gilford Motor Co Ltd v Horne [1933] Ch 935 – Some interesting detail on the company’s failings can be read here. • Jones v Lipman [1962] WLR 832 17 2-Feb-18 Business Law and Ethics Common Law Exceptions Parent/subsidiary company situations • The difficulties thrown up by the use of subsidiary companies and the way that they are to be treated under the doctrine of corporate personality have long been recognised as the following quote illustrates • “English company law possesses some curious features which may generate curious results. 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… turns out to be the runt of the litter and declines into insolvency to the dismay of its 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.” – (Re Southard & Co [1979] 1 WLR 1198, per Templeman L.J.) 18 2-Feb-18 Business Law and Ethics Common Law Exceptions Parent/subsidiary company situations • A strict reading of Salomon requires them to be treated separately • “It is a commonplace that the disposal of a subsidiary or a subsidiary’s business by its directors would require the sanction or approval of the parent company acting in this instance as the shareholder. Provided that the decision is made by the directors of the subsidiary, exercising their own independent discretion and judgment whether or not to dispose of the assets in question, and that the parent company only approves or authorises the decision, then in my judgment there is nothing which exposes the parent to liability for the decision or which constitutes it a shadow director of the subsidiary.” – Re Hydrodam Ltd [1994] 2 BCLC 180, per Millett J. 19 2-Feb-18 Business Law and Ethics Common Law Exceptions Parent/subsidiary company situations – ‘single economic entity’ • Notwithstanding the principle that the individual companies in a group are separate legal entities, there are occasions when the courts have been prepared to treat those companies as an ‘economic whole’. • Smith Stone and Knight Ltd v Birmingham Corpn [1939] 4 All ER 116 – – – – SSK – a paper manufacturing company created a wholly owned subsidiary company (waste-paper) compulsory purchase of subsidiary company’s premises who could claim for disruption to business? • Held – ‘parent company’ could claim • breach of the principle in Salomon 20 2-Feb-18 Business Law and Ethics Common Law Exceptions Parent/subsidiary company situations – ‘single economic entity’ • DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852 – – – – DHN – parent company subsidiary company 1 owned the land subsidiary company 2 ran the vehicles neither 1 nor 2 actually conducted business from the site • Q – who could claim for loss of business on compulsory purchase of the site? • A – the parent company could claim 21 2-Feb-18 Business Law and Ethics Common Law Exceptions Parent/subsidiary company situations – ‘single economic entity’ • A central question appears to be whether the subsidiary is wholly owned and has the same board of directors • Woolfson v Strathclyde Regional Council 1978 SC (HL) 90 • However, since DHN, the courts have been reluctant to broaden the ‘single economic entity’ argument • Adams v Cape Industries plc [1990] Ch 433 • Finally it may remain open to the courts to ignore Salomon where justice and/or practicality requires 22 2-Feb-18 Business Law and Ethics Conclusions • In Prest v Petrodel Resources Ltd [2013] 3 WLR 1 the Supreme Court confirmed the Salomon principle that a company is a legal entity in its own right and that the circumstances in which the courts will overturn that principle and pierce the veil are extremely limited. • As Lord Sumption stated; – “I conclude that there is a limited principle of English law which applies when 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 then pierce the corporate veil for the purpose, and 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.” (at para 35) 23 2-Feb-18 Business Law and Ethics Conclusions • Legislative departures based on policy decisions. Judicial departures less easily categorised. • Corporate personality will be respected unless the “legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime,” Farrar • “ … one will search … in vain for a single English case where the principle of limited liability, as distinct from that of corporate personality has not been respected - statute apart.” Sealy Further Reading: • Cheng-Han, Wang, & Hofmann, ‘Piercing the Corporate Veil: Historical, Theoretical & Comparative Perspectives’, Berkeley Business Law Journal, Vol. 16, Issue 1. • Hannigan, ‘Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company’, [2013] Irish Jurist 11 24 2-Feb-18 Business Law and Ethics 25 6-May-21 Business Law and Ethics Law and ethics 2 Outline Begin with different structures for business. A simple explanation on how companies differ from (partnership and the Sole proprietary businesses ! Incorporation (meaning ) Features of a company - emphasis is on the corporate veil and limited liability. Describe other features also Discuss Salomon, significance, and the additional reading on limited liability. Other cases where the court stuck with the decision and cases where the decision was not upheld. Advantages and disadvantages of limited liability (detailed discussion) When is the corporate veil pierced? Whether courts are eager to pierce the corporate veil Why or why not? All circumstances with case law (including preincorporation contracts) Conclude with your views on the ease with which limited liability is available CDDA in Lecture 2 1500