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Company Law

Corporate Personality & Lifting the Veil:
TOPIC 1
THE REGISTRAR OF COMPANIES
A company is registered by filing certain documents with the Registrar - he is
a public official appointed by the Secretary of State
...

The Companies Act 1985 (Electronic Communications) Order 2000 allows
most documentation to be submitted in electronic form
...

(b) Articles of Association
• These regulate the internal affairs of the company subject to those matters
which are otherwise specifically regulated by way of other sources of law
...
18 states: a company must have articles of association prescribing
regulations for the company unless it is a company to which model articles
apply by virtue of s
...

:-Companies Act 2006 – Model Articles (S
...


Company Law
• The Companies (Model Articles) Regulations 2008 were made on 16
December 2008
...

Model Articles are available for the three most common types of company:
•Model articles for private companies limited by shares
•Model articles for private companies limited by guarantee
•Model articles for public companies
The Memorandum must be signed (subscribed) unless submitted in electronic
form, and must show the number of shares each subscriber is taking
...

Statement must be signed by the subscribers to the memorandum and
include a written consent to act signed by those named as directors/secretary
...

The statutory declaration must be signed by a solicitor involved in the
formation of the company or by one of the persons named as director or
secretary
...
This is the
company’s "birth certificate"
...

• Certificate is conclusive evidence that registration requirements have been
met
...

• Registrar is entitled to refuse to register a company where it has been
formed for an unlawful purpose:

Company Law
R v Registrar of Joint Stock Companies, ex p Moore:
- Case of two men proposing to sell tickets in England in connection with an
Irish lottery
...

- An application was made to the court directing the Registrar to register the
company
...

- There is an Irish act which enables this to occur, however, the Irish
parliament have no jurisdiction in England
...

- The authority to sell in any place must be given by the parliament having
jurisdiction in that place
...

• The court may also be petitioned to cancel a registration if it appears that
the company has been registered for purposes which are unlawful or
contrary to public policy:
R v Registrar of Companies, ex p Attorney-General
- This case dealt with the attempted registration of a company to carry on the
business of prostitution
...

• Public companies require a further certificate - called a s
...

• Registrar will only issue s
...


Company Law

Changes made by the CA 2006 :Section 761: Public company: requirement as to minimum share capital
This section replaces section 117(2) of the 1985 Act and restates section
117(1), (4) and (6) of that Act
...

The current requirement for a statutory declaration to be filed with an
application for a trading certificate, contained in section 117(2) of the 1985
Act, has not been carried forward
...

As now, the registrar will only issue a trading certificate if he/she is satisfied
that certain conditions are met: in particular the company must satisfy the
minimum share capital requirement for public companies – known as the
“authorised minimum”
...

Section 762: Procedure for obtaining certificate
This section replaces section 117(3) of the 1985 Act
...

The current requirement for a statutory declaration (or “electronic statement”)
when an application is made for a trading certificate is replaced by a
requirement to make a statement of compliance
...
It will be
for the registrar’s rules to specify who may make this statement (and the form
of it)
...
Under section 118 the
authorised minimum is £50,000
...

This section retains the authorised minimum at £50,000
...

Once a company has obtained a trading certificate under section 762 or
section 117 of the 1985 Act (in the case of companies that obtain a trading
certificate before these provisions of the Act come into force), there is no

Company Law
requirement for the authorised minimum to remain denominated in sterling or
euro, and if it wishes a public company may subsequently redenominate all of
its share capital (including the authorised minimum) under the provisions of
Chapter 8 of Part 17 of the Act
...

(This does not affect the validity of any contracts entered into by the
company)
...
The veil of incorporation ensures that a company is a separate
legal entity from its directions and shareholders, thus protecting the personal
assets of owners and investors form lawsuits
...
As a person
separate from its members, a company can:
▪ Own property,
▪ Enter into contracts,
▪ Be a party to legal proceedings
...

The principle behind the Veil of Incorporation is known as limited liability
...
The significance of the veil of
incorporation is that a shareholder or owner incurs no debt that the business
acquires
...


EFFECT OF SEPARATE LEGAL PERSONALITY

Company Law
The veil of incorporation was first established in the LEADING case of
Salomon v A Salomon & Co Ltd
...

A company’s property is owned by the company as a separate person, not by
the members; the company’s business is conducted by the company as a
separate person, not by the members; it is the company as a separate
person that enters into contracts in relation to the company’s business
and property
...
He sold it to the company incorporated for the purpose
called Saloman v A Saloman & Co Ltd whose only members were himself, his wife and 5 children
...
The business was sold
to the company for £39,000
...

▪ The rest of the £9,000 was paid in cash
...
The holder of a debenture on the
company’s assets is entitled, on liquidation of the company, to have the assets covered by the charge applied to the
payment of the debt secured by the charge
...

The company’s liquidator took a stand on behalf of all the creditors
...
The liquidator wanted to ignore
somehow the fact that Mr S had sold his business to a separate person, A Saloman & Co Ltd, and that Mr S now had
limited liability to that company instead of unlimited liability he had when he conducted the business as a sole trader
...

At first instance it was held that the company had conducted business as an agent for Mr S, so that he was responsible
for the debts incurred in the course of the agency for him
...

Second Instance, in the Court of Appeal, it was held that Mr S has incorporated the company contrary to the true intent
and meaning of the Companies Act 1862 and that, because of Mr S’s fraud the company should be seen to have
acted as a trustee for Mr S, who should indemnify the company of all debts incurred in carrying out the trust
...
There was nothing at all in the Act to show that what Mr S had done was prohibited
...


(a) Company is liable for its own debts

(b) Limited Liability:
• The fact that the company is a separate person from its shareholders makes
limited liability possible
...
This contractual capacity is a
major advantage of corporate personality
...
Whilst engaged in the company business, his plane crashed and he
was killed
...
The company’s insurers argued
that Lee was not an employee of the company, on the basis that he was the company and had
therefore made a contract with himself
...
Lee had not made a contract with
himself, rather he had made a contract with the company, which was a separate entity
...

• (Remember: the company’s liability is always unlimited - it is the members’
liability that is limited and that liability is to the company, not to the individual
creditors
...

• Person who no longer wishes to be a member is only entitled to whatever
price he can get for his shares
...

The case of MACAURA v NORTHERN ASSAURANCE CO LTD [1925] illustrates
that a company’s property is the property of the company as a separate person not
the members
...
He created a company in which he owned almost all of the
shares
...
He transferred all the timber to this new
company, in return for which he obtained a number of fully paid-up shares in the company
...
Subsequently, the timber was
destroyed in a fire but the insurance company refused to payout
Legal Principle: The insurance company was entitled to refuse payment as, whilst the timber was
insured on Macaura’s name he had no insurable interest in the timber, the company did, and so could
not claim on the insurance policy
...
Accordingly, Mascara’s claim failed because Lord Wrenbury said:
“…My Lords, this appeal may be disposed of by saying that the corporator even if holds all the
shares is not the corporation, and that neither he nor any creditor of the company has any
property legal or equitable in the assets of the corporation…”

FARRAR v FARRARS LTD [1888]: EXTRA CASE (NOT IN YOUR LIST BUT LEARN IF YOU HAVE

TIME)
Concerning: Illustration of corporate personality; property belongs to the company not its members:
Facts: Three individuals were joint mortgagees of a stone quarry
...
They sold the quarry to Farrars Ltd, a company in which
two of them held shares
...
To hold that it is, would be to ignore the
principle which lies at the root of the legal idea of a corporate body, and that idea is that the corporate
body is distinct from the persons composing it
...

• (Companies may also be liable in negligence - shareholder cannot be made
liable for the negligence of the company, unless he was also personally
negligent)
...

Some limitations:
- it has been held that a company cannot be convicted of a crime which
requires the physical act of driving a vehicle:
Richmond on Thames Borough Council v Pinn & Wheeler
- a company cannot be convicted of any crime for which the only available
sentence is imprisonment
...

In order to convict companies of common law crimes, courts may regard the
mens rea of those individuals who control the company to be the mens rea of
the company
...

It is theft to steal from a company, even if those accused of the theft are also
the company’s only shareholders:
R v Philippou

(f) Perpetual Succession
Separate personality means that the existence of a company does not depend
on the existence of its members
...

(g) Borrowing
A company can borrow money and grant a security for a debt
...


Company Law

Floating charge = a kind of security for a loan
...
Certain events cause the charge to
"crystallise" and attach to whatever assets the company has at the time
...

• The screen separating the company from its individual shareholders and
directors is commonly referred to as "the veil of incorporation”
...

• When a company carries on trading with less than 2 members, or when
fraudulent or wrongful trading is found to have occurred, action can be taken
against individuals of the corporation
...
These
types of companies are often referred to as an alter ego, a sham or cloak
corporation, and in these cases accountability belongs to the person
responsible for the illegal action
...
In effect they want to ignore the artificial separate personality of
a company in certain circumstances
...
Courts have yet to provide a
comprehensive definition of the corporate being and specific circumstances
in which the veil can be lifted
...

• Whenever it is claimed that a court decision ignores a company’s separate

personality, the question that should be asked is: Would the decision have been
the same if the company had been a human being?

•

Yes the company is being treated as a person and no principle of
company law has been overridden
...

o The central problem was summarised by Lord Neuberger in
VTB CAPITAL PLC V NUTRITEK INTERNATIONAL
INCORPORATION [2013]: “A company should be treated as
being a person by the law in the same way as a human being
...
”
• The concept of a company being a legal entity can sometimes give
undesirable results
...


Company Law
• There are therefore numerous exceptions to the rules defined by Salomon
v Salomon & Co Ltd
...

WHAT AMOUNTS TO IGNORING SEPARATE CORPORATE PERSONALITY :
Narrower and wider views of the consequences of separate corporate
personality:
There are two views of what legal consequences a company’s legal
personality has on persons such as its members, directors, or another
company in the same group;
1
...

o This was the view taken in the SALOMAN case
...

2
...

o The wider view also regards separate corporate personality
as avoided whenever a court considers information about a
company’s members, and/or other directors and/or other
companies in the same group when deciding a case
concerning the company
...

o This is the approach taken when dealing with a group of
companies, which shall be treated as one single unit for the
purposes of lifting the veil
...

*EXTRA CASE JUDGEMENT:
VTB CAPITAL PLC V NUTRITEK INTERNATIONAL CORPORATION: Arnold J
said that “…the expression ‘piercing the veil’ is a convenient label which is
used to identify cases in which the courts have granted relief which involves,
or perhaps more accurately appears at first blush to involve, disregarding the
separate legal personality of a company from the person or persons who
control it
...
Generally, courts will intervene where justice demands it
...
In cases of Sham or fraud

Gilford Motors Ltd v Horne [1933] ch 935
Concerning: The veil can be lifted in the instance of where the company is being
used
as an instrument of fraud or is a sham which merely conceals the true facts to avoid
the members of a company getting liability
...
His
employment contract provided that he should leave the company and he would not
attempt to solicit any of the customers
...
It was clear that
this new company was set up at the defendants behest and was under the
defendants
control
...
Lord Handworth MR stated
that the new company was ‘formed as a device…in order to mask the effective
carrying on of a business of the [the defendant]’ and to avoid the restrictive covenant
...

Facts: Mr Lipman had entered into a contract with Mr Jones for the sale of land
...
He formed a
company in order to avoid the transaction and conveyed that the land to the company
instead
...

Legal Principle: The judge again found the company was a façade and granted order
of specific performance
...

Facts: W was employed by C
...
W worked and had the same
benefits as all other employees of C
...


Re Bugle Press Ltd
Concerning: The veil can be lifted in the instance of where the company is being used
as an instrument of fraud or is a sham which merely conceals the true facts to avoid he
members of a company getting liability
...
In an agency relationship

- Court may lift the veil on the basis that one company is merely carrying
on business as the agent of another - so that transactions entered into by
the subsidiary can be regarded as transactions of the holding company

- If a subsidiary company is acting as an agent for its holding company, it
may be bound by the same liabilities and rights of its holding company
...


- If the legal relationship of agency exists between two persons, the
principal and the agent, the principal is responsible for whatever the
agent does within the scope of the agency
...


- Whether someone is an agent is a question of fact
...


- Nothing in company law prevents a person agreeing that a company is to
be his, her or its agent, making that person liable for what the company
does within the agency
...


- In the absence of an agency relationship SALOMAN V A SALOMAN
-

LTD established that the circumstance that a person is a member of a
company does not in itself make the company an agent of that person
...
These
kinds of cases are very rare as for the relationship of agency to exist there needs to
be expressed consent between the parties, the principal and agent, and if the agent is
a agent for the members it is unlikely there would be any express agreement stating
that as the whole point of company’s is to limited a members liability
...
However, the claimant never transferred ownership of the business
to the newly created subsidiary purchased by the defendant, who planned to pay
compensation to the subsidiary for the loss of business
...

Legal Principle: The subsidiary was the agent of the claimant and therefore, the
corporate personality of the subsidiary was ignored and the claimant obtained
compensation
...


is benefit the members
...

Facts: The defendant parent company (Cape) was based in England
...
The asbestos was sold by two other
subsidiary companies- one based in England and the other based in the USA
...
A US court ordered that $15 million to be
paid in damages, but this could only be enforced in the UK against Cape if it was present in
the USA through its USA subsidiary
...

Legal Principle: The court refused to lift the veil and held that the US subsidiary was
separate and distinct from the UK parent
...
SALOMAN allowed
the parent company to use its subsidiaries to avoid liability in this way, and the court was of
the opinion that, on the facts, there were no grounds to avoid following SALOMAN
...
The US subsidiary was a fraud or a sham
2
...
The US subsidiary was an agent of cape, and
4
...

All of these arguments failed in this and the court strongly reaffirmed the principle in
SALOMAN and indicated that corporate personality will not be lightly case aside
...
It should be noted though that there is considerable academic
disagreement regarding the classifications of the instances when the courts will pierce the
veil and therefore the 4 categories should not be regarded as universally or definitively
accepted
...
In a single economic unit:

Company Law

- In the past, courts have been willing to lift the veil on the basis that a
group of companies was not a group of separate persons, but a single
DHN Foods v London Borough of Tower Hamlets [1976 1WLR 852]
Concerning: The veil can be lifted in the instance of where a group of companies
are really acting as one single economic unit
...

Facts: DHN was a holding company that included 2 wholly subsidiaries
...
The land was compulsorily purchased by the
defendant, who paid £360,000 compensation to the subsidiary
...
DHN argued that it was
entitled to compensation for the loss of business, but the law provided that only
those with a legal or equitable interest in the land were entitled to such
compensation, with a bare licence not conferring such an interest
...
Lord
Denning MR stated that the subsidiaries were ‘bound by hand and foot’ to DHN and
that ‘the group is virtually the same as a partnership where all three companies are
partners’
...


economic unit:
Later case have doubted this principle: (Also Refer back to Adams v Cape for
Woolfson v Strathclyde RC 1978 3C (HL) 90
Concerning: The veil can be lifted in the instance of where the company is being
used as an instrument of fraud or is a sham where special circumstances
indicating that there is a mere façade concealing the true facts
...

Fact: Mr W owned 999 of 1000 shares; the other one share was held by his wife
but not as a nominee for him
...

Legal Principle: Lord Keith held that to distinguish the case from DHN case so
that Woolfson and Solfred were not entitled to compensation for business
disturbance
...
Lord Keith had some doubts about
whether the CoA in the DHN case ‘properly applied the principle that it is
appropriate to pierce the corporate veil only where special circumstances
indicating that there is a mere façade concealing the true facts
...
The
US subsidiary had no assets
...
If he had sued the US subsidiary, He would have received
no compensation since thee was no money to Pay out
...

Legal Principle: The courts held that, even though they Recognised that the
corporate structure was designed to minimise liability and taxation, it was not illegal
and should not be considered a Single economic unit
...
If there was a monopoly which set up
ten subsidiaries to make it appear as if there was competition, the ECJ
could consider all companies to be a single economic unit
...
State of hostility:

- In times of war, courts may regard a British company as an enemy alien if
Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd
FILL IN DETAILS OF CASE

the company is controlled by nationals of an enemy country:
5
...

sufficient to show that no agency relationship exists, because their has been no consent to one
Facts: The case concerned 2 companies; Breachwood Welwyn Ltd and Breachwood
being created
...
The two companies had directors in common
...
C claimed that there was
a company is sued for damages Breachwood has committed and the claimant alleges that
wrongful dismissal on behalf of Welwyn
...
thedoing so, they paid odd the creditors but they did not pay can be
Mr for it
...
A year later, Welwyn was
struck off the companies register and dissolved
...

Legal Principle: The judge in this case ignored the strict approach outlined in
ADAMS, in finding that the central issue was that, with the benefit if a solicitor’s
Advice
...
They had
transferred Breachwood Welwyn Ltd
...
The court was
therefore justified in lifting the veil and treating Beachwood Motors as liable for
Breachwood Welwyn’s liability for Mr C
...


Company Law

Exceptions implemented by Statute:
• Some statutory provisions have the effect of piercing the corporate veil to
make directors personally liable
...

• In DIMBLEBY AND SONS LTD V NATIONAL UNION OF JOURNALISTS [1984]
Lord Diplock stated: “The ‘corporate veil’ in the case of companies
incorporated under the Companies Act is drawn by statute and it can be
pierced by some other statute if such other statute so provides; but in the
view of its raison detre and its consistent recognition by the courts since
Salomon v A Salomon and Co Ltd [1897], one would expect that any
parliamentary intention to pierce the corporate veil would be expressed in
clear and unequivocal language
...

Facts: Ord and Belhaven Pubs Ltd was engaged in a legal action about a lease
...
As a result of the reorganization Belhaven Pubs Ltd had
no assets or liabilities therefore have nothing with which to pay any judgment against it
...

Legal Principle: The HC judge who first heard the case allowed the substitution
...
The assets were transferred at full value and the motive
appeared to be the group’s financial crisis rather than an ulterior motive
...


Company Law

Situations where "veil is lifted" by Statute
(i) Companies Act 1985 s
...
Member who knows he is the sole member but
continues to trade will be jointly and severally liable with the company for
company debts contracted after the six month period has elapsed
...
24 no
longer applies to private limited companies)
(ii) Companies Act 1985, s
...
If the company fails to comply with any
obligations under a transaction within 21 days of being called on to do so, the
directors of the company are jointly and severally liable to indemnify the third
party against any loss
...
349 - if person acting on behalf of a company
signs or authorises the signing of a bill of exchange, cheque, order for goods
or similar document in which the company’s name is not correctly stated, the
person signing will be personally liable if the company fails to pay
...

• S
...

• S
...


S
...
993 CA 2006 are virtually identical
...
993 CA 2006 as: a valuable weapon in countering
corporate crime
...

In order to make a person liable under S
...
993
CA 2006 it is necessary to prove three elements:
1) That business of the company has been carried on:
a
...
With intent to defraud creditors of any person
c
...


WHAT AMOUNTS TO FRAUD?:
The phrases ‘intent to defraud’ and ‘fraudulent purpose’ used in S
...
[RE PATRICK AND LYON
LTD [1933]]
...

• It is essential to prove dishonesty in order to secure a conviction under S
...

Dishonesty has been subject to further analysis in the context of secondary liability
for breach of a fiduciary duty, where a combined objective and subjective test has
been adopted
...

It is not necessarily fraudulent for a company to pay some of its creditors ahead of
others, even if it is clear that this will mean that some of the creditors will not be paid
in full
...
11: STATUTORY LIFTING OF THE VEIL (WRONGFUL
TRADING):

Company Law

PRINCIPLE:
According to its title s
...
This section
empowers the court to declare a director of a company liable to contribute to the
assets of the company if the director knew, or ought to have concluded, that the
company had no reasonable prospect of not going into insolvent liquidation and did
not take up every step that ought to be taken by that director to minimize the
potential loss to the company’s creditors
...

The section comes into operation only if a company goes into liquidation at a time
when its assets are insufficient for the payment of its debts and other liabilities and
the expenses of winding up and it is for the company’s liquidator to apply to the court
for a declaration and it is for the company’s liquidator to apply to the court for a
declaration
...
214 IA 1986 TWO elements must be
proved:
1) Knowledge, actual or constructive, that insolvent liquidation was
unavoidable
...

In order to make a person liable under s
...
However, the director or shadow director may in defence prove that he
‘took every step…he ought to have taken’ to minimize creditor’s loss
...

• S
...
214 (5) IA 1986: attempt to specify what that standard is
...

In other words, a person who is not sufficiently qualified for his job is to be treated by
the standards of someone who is ideally qualified while someone who is
overqualified is to be tested by the higher standards he happens to possess
...
214 (5) IA 1986: emphasis this by requiring the court to look at the ideal
qualifications of a person doing their job with which the person whom the
declaration is sought was entrusted
...


Company Law

20
...


• S
...

• There is both criminal (s
...
217) liability for all the debts and
other liabilities a company managed in contravention of s
...

The primary purpose of the provision is to deal with what has become known as the
‘phoenix syndrome’, in which the directors of a company which have been wound up
set up the same business, often on the same premises, with a similar name, often
repeating the process several times
...
216 is not restricted to those circumstances
...




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