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AGENCY
1
...
e
...
” (from Davidson and Macgregor, p
...

Why would they want to act through an agent?
1
...
Agent has special knowledge or expertise which the principal lacks
3
...
The categorisation reflects the
function of the agent and carries implications for the scope of authority (below)
...

Agency v agency-like situations
Distributorship v True Agency
Negotiorum gestio v Agency: Fernie v Robertson (1871) 9 M 437

A tripartite situation
(a) Agent–Principal: the agency contract
(b) Principal–Third Party: juridical acts done by the agent
(c) Agent–Third Party: when things go wrong
Ways in which an agency may be set up:
1
...
dliberate appointment by a principal, and grant authority to act on principal’s
behalf
b
...
agency by implied appointment
a
...
g
...
can also be implied by operation of law – Partnership Act 1980, s
...
agency by ratification
a
...

b
...
agent must act as agent and must have intimated to the third party
that he was acting as agent, not of his own account (Keighley Maxted
& Co
...
principal must exist at time of act (Tinnevelly Sugar Refining Co
...
principal must have the requisite legal capacity to carry out the act so
contract on a child would not be binding
iv
...
principal must ratify agent’s act within any specified timescale
(Goodall v Bilsland)
vi
...
agency by necessity
a
...
known as negotiorum gestio
c
...
agency by holding out
a
...
if relied upon by 3d party, unfair to reverse it, so becomes implied (Freeman
& Lockyer v Buckhurst Park Properties (Mangal) Ltd)
6
...
agent guarantees payment or performance by 3rd party
...
Agent bears risk of the transaction
2
...

Bell, Commentaries, (7th edn 1870) I, 539 and Millar v Mitchell (1860) 22 D 833
Juridical acts done by the agent on behalf of the principal are attributed to the latter rather
than the former
...

Key concepts: authority and disclosure
3
...

Limitation of the Agent’s authority:

-

where an agent:
(a) exceeds his authority
(b) acts in such a way that a third party has no reason to suspect that the agent is
exceeding his authority
(c) the principal has not intimated the agent’s lack of authority to the 3rd party  the
principal may be liable for the agent’s unathorised act (Watteau v Fenwick

4
...

What is the scope of an agent’s authority? This is a function of both the category of agent
concerned and the authority of the agent
...

Actual authority sub-divides into express or implied authority
...

(b) Implied
Authority can be implied from
-

Into the terms of the agency contract
From the category of agent: mercantile agents (Factors Act 1889 s 2);
partners (Partnership Act 1890 s 5)
...


(c) Ad hoc agency – implied authority for a specific transaction: Whitbread Group plc v
Goldapple (No 2) 2005 SLT 281 – in cases where there is a mismatch between the
parties to a contract and those who are performing the obligations and enforcing the
rights, the person who is acting as a de facto party to the contract can be considered to
be the agent of the true contracting party in order to get round the mismatch
...
APPARENT AUTHORITY
There is no express or implied authority but the representation or conduct of the principal
creates the impression of authority
...

- also arises where an agent performs actions appropriate for his position (Watteau v
Fenwick)
- where 3rd party knows agent is not authorised to carry out the act, the principal is not
liable
- however, if the 3rd party knew, but the agent gave the impression that the principal
would approve the agent’s actions, the principal is liable for not contradicting that
impression at an early stage First Energy (UK) ltd v Hungarian International Bank)

International Sponge Importers Ltd v Andrew Watt & Sons 1911 SC (HL) 57
*Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
An agent cannot represent his own authority: Armagas v Mundogas SA [1986] AC 717, cf
First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] BCC 533(company
negotiating a loan with a bank employee who acknowledged that he did not have authority to
grant it, but contacted superiors to get authorisation, but he never did
...

Requirements:
1
...
can be held on the basis of minimal action by the principal (International Sponge
Importers Ltd v Andrew Watt & Sons)
3
...
transaction on that basis
Traditionally treated as a species of personal bar
...
scotcourts
...
uk/opinions/A1523_09
...
RATIFICATION OF ACTS OUTSIDE THE AUTHORITY OF THE AGENT
General principle 3: a valid ratification produces the same result as if the agent had acted
under antecedent authority
...

Bolton Partners v Lambert (1889) 41 Ch D 295
Goodall v Bilsland 1909 SC 1152
Conditions for ratification to be effective:
-

The principal must be in existence
The principal must have legal capacity: Boston Deep Sea Fishing and Ice Co Ltd v
Farnham [1957] 1 WLR 1051
The agent must have purported to act as an agent– i
...
ratification is not possible in
cases where there is an undisclosed principal: Keighley Maxsted & Co v Durant
[1901] AC 240
The principal must make an informed choice: Forman & Co Pty v The Liddesdale
[1900] AC 190
Relevant time-limits must be observed: Goodall v Bilsland 1909 SC 1152
The contract must be otherwise valid

-

Cannot prejudice a property right which has been acquired by a third party: Bird v
Brown (1850) 4 Exch 786
...
DISCLOSURE
What if the agent does not disclose or name the principal? – protects 3rd parties
...

(b) An undisclosed principal
-

The principal can disclose and enforce a contract
The third party must elect whether to sue the agent or the principal:
Meier and Co v Kuchenmeister (1881) 8 R 642; David Logan &
Sons v Schuldt (1903) 10 SLT 598
May be excluded in cases of deceit: Said v Butt [1920] 3 KB 497

8
...

However, the agent can have obligations to the third party in the following cases:
Bound under the contract
(a) Disclosed or unnamed principal (see above)
(b) Signing documents: Stewart v Shannessy (1900) 2 F 1288
(c) Companies Act 2006 s 51
Bound to compensate for the loss of the bargain
(d) Breach of warranty of authority: - where the agent act outwith his authority, he is
liable to the principal for BofW (Irving v Burns)
Strict liability to pay damages compensating the third party for loss of the bargain
Analysed as a collateral contract or promise:

Anderson v Croall & Sons Ltd (1903) 6 F 153
Cheshire Mortgage Corporation v Grandison 2013 SC 160
...
THE PRINCIPAL-AGENT RELATIONSHIP: THE AGENT’S DUTIES
An agent owes duties arising from the (agency) contract and from the fiduciary nature of the
relationship with the principal:
(a) To follow instructions:
Gilmour v Clark (1858) 15 D 478 (If he fails to carry out any instructions he will be
liable);
Milne v Ritchie (1882) 10 R 365 (agent should not exceed the limits of his authority and
where he does so, and the principal becomes liable to the 3rd party, the agent will in
turn be liable to the principal for their loss) and to adhere to any contract terms
between the principal and the agent
...
The
standard for a professional person is that of a reasonably competent member of the
profession:
Hunter v Hanley 1955 SC 200
...
If
the agent fails to exercise proper skill and care he will be liable (Luxmore-May v
Messenger May Baverstock)
(c) No delegation: the general rule prohibiting delegation is subject to many exceptions
...
3
...
(or where permission is obtained
from the principal)
(d) Duty to account to the principal: this covers both an explanation of transactions to
which the agent has bound the principal and a statement of sums due and payable by
the principal (Simpson v Duncan)
(e) Fiduciary duty: the general principle of good faith and its consequences
(i)

(ii)

(iii)

conflicts of interest – M’Pherson’s Trustees v Watt (1877) 5 R
(HL) 9 and Lothian v Jenolite Ltd 1969 SC 111 (agent must act in
good faith in the best interests of the pincipal, without obtaining
any benefit other than what is permitted by the principal and
without letting any conflict of interest arise – the only cure in
conflict of interest cases is to disclose his interest to the principal
and seek the consent of the principal for his course of action
...
THE PRINCIPAL-AGENT RELATIONSHIP: THE PRINCIPAL’S DUTIES
(a)

Remuneration – circumstances in which remuneration is due to the agent –
Walker, Fraser & Steele v Fraser’s Trustees 1910 SC 222 at 229 per Lord
Dundas – reg 6(1), commission governed under regs 7-11, and the agents rights
to information in order to determine commission due is reg 12
...
))
Compensation calculated by reference to the damage which the agent
suffers as a result of the termination of the agency relationship and cover
costs incurred in the performance of the contract (reg17(6)-(7))

10
...
COMMERCIAL AGENTS – A SPECIAL REGULATORY REGIME
Legislation: Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053)
(Derived from the Self Employed Commercial Agents Directive 86/653/EC)
Definition of a commercial agent:
“A self-employed intermediary who has continuing authority to negotiate the sale or
purchase of goods on behalf of another person (the “principal”) or to negotiate and
conclude the sale or purchase of goods on behalf of and in the name of that
principal
...

- when the relevant activities of the agent are ‘secondary’: Reg 2, Sch 2,
Gailey v Environmental Waste Controls [2004] Eu LR 423)
The regime alters the common law to some extent – two changes are of particular
significance:
(a) Remuneration and commission: reg
...
This is a default rule and can therefore be altered or
removed by the agency contract
...
15 sets minimum notice periods – this is a default rule and can be
adjusted upwards by the agency contract
...
17 enables an agency contract to specify that an agent will be
indemnified following termination of the agency for the continuing benefits
derived by the principal from the agency – the maximum sum is one year’s
remuneration
...


-

Compensation: reg
...
Termination includes expiry
of a fixed term agency: Frape v Emreco International 2002 SLT 371
...
17 is a mandatory rule (see reg
...
18 are applicable (e
...
the commercial agent has terminated the
agreement): Ingmar GB Ltd v Eaton Leonard Inc [2001] CLC 1825;
Accentuate Ltd v Asigra [2009] EWHC 2655 (QB); [2010] 2 All ER (Comm)
738
...


PARTNERSHIP
Company – Companies act 2006
Partnership – Partnership Act 1890
Limited partnership – Limited Partnerships Act 1907
Limited Liability Partnership – Limited Liability Partnerships Act 2000
1
...
the relation which subsists between persons carrying on a business in common with a
view of profit”: s 1(1) Partnership Act 1890 – 2 or more people
“… a legal person distinct from the partners of whom it is composed”: s 4(2) Partnership Act
1890
Essential features:
- collective relationship
- business relationship: Khan v Miah [2000] 1 WLR 2123;** Ilott v Williams [2013]
EWCA Civ 645
- profit-making venture
a joint venture may amount to a partnership (White v McIntyre)
partnerships can be formed for a short period of time (s27 1890 Act)
s2 1890 act = guidance on identifying a partnership
s24 = default rights in the absence of an agreement
...
SOURCES OF LAW ON PARTNERSHIP
Partnership Act 1890
General rules – is there a partnership? (ss 1-4)
Mandatory rules – relationships with third parties (ss 5-18)
Default rules – internal organization of the partnership (ss 19-44)
The residual role of the common law – s 46
The word “firm” means a partnership
...
IS THERE A PARTNERSHIP?
s 1(1) Does it fulfil the definition?

Everett v Williams (1725) (Noted (1893) 9 LQR 197)
s 1(2) Is there a company?
s 2 guidelines for determining the existence of partnership:
• joint, common or part ownership of property (Sharpe v Carswell 1910 SC
391) is not partnership; (s2(1) PA)
• sharing gross returns (Clark v Jamieson 1909 SC 132) is not partnership;
(s2(2) PA)
• sharing profits is prima facie evidence of partnership explained in s2(3) PA
where receipt of a share of the profits does not make the recipient a partner:
o the repayment of a debt out of the profits of a business (s2(3)(a))
o where an employee is rewarded by a share of the profits (s2(3)(b))
o where the recipient is a dependent of a former partner and receiving
by way of an annuity a portion of the business’s profits (s2(3)(c))
o where a lender lends money to a business and the contract for the
loan, which must be in writing and signed by all the parties thereto,
states that the interest rate is to vary according to the business’s
profits (s2(3)(d))
o where the recipient is paid an annuity or receives some other benefit
out of the profits of the business in consideration of the sale by him
of the goodwill of the business (s2(3)(e))
S3 – only once all the other creditors have been repaid in full may the lender/seller be repaid
...

There are no longer any limits on the size of partnerships as a result of the Regulatory Reform
(Removal of 20 member limit in Partnerships etc) Order 2002 (SI 2002/3203)
Partnerships do not exist where the persons involved have yet to reach the stage of “carrying
on a business” (Khan v Miah)
...
colleagues with whom to share losses as well as profits
b
...
rights of management in the partnership
d
...
the presence of colleagues to help share the burden of running the business
Partnership disadvantages:
a
...
the difficulty of raising a loan against the value of any assets other than heritage
s11 – the firm is liable for misappropriations of money made by a partner in the course of
business
s12 – partners of the firm are jointly and severally liable
s13 – exception regarding property

Mair v Wood – a partner who suffered loss as a result of a negligent act of a fellow partner
could not sue the partnership as being vicariously liable for the partner’s wrongful acts
...
SEPARATE LEGAL PERSONALITY
In Scotland a partnership has a separate legal personality – s 4(2) of the 1890 Act and its
consequences:
(a) Can own property (including land)
(b) Can be a party to contracts: s 5
(c) Can be liable in delict: s 10
(d) Can sue and be sued
See further P Hemphill “The personality of partnership in Scotland” 1984 JR 208; G L
Gretton “Who owns partnership property?” 1987 JR 163
Quasi-personality?
Partners are liable for the firm’s debts: s 9
Special rules for suing in the Court of Session: Antermony Coal Company v Wingate & Co
(1866) 4 M 1017
Partnerships cannot be registered as the owners of ships: Merchant Shipping (Registration of
Ships) Regulations 1993/3138 Regs 7 & 12
...
This was said to
be because it was ‘incapable of sustaining the feudal relation’, which sounds like a
physical dysfunction not to be mentioned in mixed company
...
Instead, as
before, individual partners own heritable property as trustees for the partnership
...
So there are four layers:

Land
Partners (as trustees for partnership)
Partnership (legal person)
Partners’ rights against the partnership
The legal nature of a partner’s share in a partnership is an incorporeal moveable right: a
personal right (or set of personal rights) against the firm
Assignation of a share in a partnership (s 31 of the 1890 Act):
-

permitted by s 31(1)
But the assignee is does not assume the rights of a partner unless…
the existing partners consent to the assignee being admitted as a partner
...
RELATIONS WITH THIRD PARTIES
Authority
Partners can have any of the forms of authority that are available to an agent
...
However, where the partner does not in fact have the authority to
act in a particular transaction, and the person with whom he is dealing either knows that the
partner does not have authority for the transaction, or does not know or believe that the
partner is a partner, the transaction will not bind the partnership
...
When a partner signs a
document on behalf of the partnership, he will bind the partnership (s5), even if as a matter of
practice his fellow partners have not permitted him to do so
...
See too P Stein,
“The Mutual Agency of Partners in the Civil Law” (1959) 33 Tulane L Rev 595 at 604 ff
...


Liability
Liability of firm for wrongs done by partners: s 10 of the 1890 Act – Hamlyn v Houston & Co
[1903] 1 KB 81, CA; Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48
Joint and several liability for the debts of the firm – s 9 of the 1890 Act
...

These provisions apply equally to so-called “salaried” partners
...
CHANGES IN PERSONNEL
A Scottish partnership has legal personality
...
There is no register of business names (although there
used to be)
...

But while a Scottish partnership may have legal personality, does it have perpetual
succession? In other words, does the legal person continue on a change of partners? As ever,
the first place to look is the partnership agreement
...
There is some doubt as to the efficacy of such agreements: see Inland
Revenue v Graham’s Trustee 1971 SC (HL) 1 and Jardine-Paterson v Fraser 1974 SLT 93
...
Change in membership does not releave prior partners of liability: s 5
...
RELATIONSHIP OF PARTNERS TO ONE ANOTHER
Ultimate source is the partnership agreement: s 19
Duty of care: Ross, Harper & Murphy v Banks 2000 SC 500 at 509–10 per Lord Hamilton
(Ordinary)
Default rules in 1890 Act ss 19-31
S19 – where express agreement is absent, agreement may be inferred from the partners’
course of dealing
...

Default rules governing the firm in s 24 of the 1890 Act:
Pecuniary rights
- equal share in capital and profits (equal shares): s 24(1)
- right to indemnity for liabilities incurred on firm business: s 24(2)
- no right to interest on agreed capital contribution but right to interest on other
advances: s 24(3) and (4)
- no right to remuneration (as distinct from profits): s 24(6)
Management rights
- right to participate in the management of the partnership: s 24(5)
- right to inspect books: s 24(9)
- ordinary matters decided by majority rule: s 24(8)
o unanimous consent required to change the nature of business
o unanimous consent required to admit new partners: s 24(7)
o expulsion of a partner (no partner may be expelled by mere majority,
unless the partnership agreement permits this)– s 25 – Carmichael v
Evans [1904] 1 Ch 486
Fiduciary duties
Barr v Gilchrist [2011] CSOH 72
-

duty to render accounts: s 28
duty to account for private profits: s 29
duty not to compete with his firm: s 30
where a partner assigns his interest in the firm to a 3rd party, they have no right of
management of that partner’s share of the business, instead, they are merely
entitled to the share of the profits – s31

8
...

s43 – amounts due by surviving partners to a deceased or retiring partner are
a debt accruing at the date of dissolution or death
Partners share losses in proportion to right to profits: s 44(a) – applies on
between the partners inter se
Distribution of assets: ss 39 & 44(b)
» External debts
» Partners’ advances
» Repayment of capital
» Residue paid out in proportion to right to profits

*Duncan v The MF Marigold Pd145 2006 SLT 975 (winding up the firm may take different
forms: the business may be disposed of as a going concern to a third party; or disposed of to a
new firm formed by the surviving partners
...
Dissolution of the firm does not releave former partners of liability: s 2(1)
...
VARIATIONS ON THE STANDARD PARTNERSHIP MODEL: LPs and LLPs
There are some downsides to a partnership: it is easy to get into a partnership without
knowing it; although the firm is a legal person, the partners are, in effect, guarantors of the
firm’s debts; the law on the effect of partners leaving the partnership is unclear; and the rules
on dissolution are complex
...
5 of the 2001 Regs
(d) Designated and non-designated members (s 8)
(e) The internal relationship of the members is governed by an agreement that need
not be registered, alternatively by the default rules in Part 6 of the 2001 Regs
(f) Every member of an LLP is an agent for it (s 6)
(g) The LLP is vicariously liable for delicts of its members (s 6)
(h) Insolvency: LLPs are subject to the insolvency regime applicable to companies,
with modifications
...

(i) LLP can grant a floating charge: The Limited Liability Partnerships
(Amendment) Regulations 2009 (SI 2009/1833): Companies Act 1985, s 462,
continues to apply to LLPs
(j) Many of the provisions of the Companies Act 2006 apply to LLPs: Limited
Liability Partnerships (Application of Companies Act 2006) Regulations 2009 (SI
2009/1804)
(k) Each member has a right to call other members to account for their intromissions
with the LLP’s assets; that right to an accounting extends also to provision of full
information (2001 regs, reg7(8)
(l) Decision making requires a bare majority of members (reg 7(6)) only 2 matter
require unanimity: decision to change the nature of the LLP’s business (reg 7(6)),
and, a decision to expel a member (reg 8)
On the duties of members to each other and to the LLP, see F&C Alternative Investments
(Holdings) Ltd v Barthelemy [2011] EWHC 1731 (Ch), especially paras 204–220
(b) LPs
The Limited Partnerships Act 1907
-

-

registration requirement (s 5) at companies house (s15)
application of Partnership Act 1890 unless excluded by the 1907 Act
at least one general partner with full liability for the debts of the firm: s 4(2)
limited partners cannot take part in management and if they do they assume
liability for obligations incurred during the relevant period (s 6)
In practice, the general partner of most LPs is itself a limited company
LPs are very common in agricultural leases (where landlord is the limited partner
and the tenant the general partner); in financial practice, where SPVs are often
LPs (and often offshore LPs); and in private equity transactions
...


NOTES
Partnerships can incorporate as an LLP or Limited company (Solomon v A Solomon and Co
Ltd) but the normal case is that the business and assets of the partnership are purchased by the
corporate entity, the consideration for the purchase being equity in the company, and the
partnership is thereupon dissolved

Companies
Incorporation by registration
S 7(1)(a) and (b) – procedure for forming a company – strict procedure
S 8 - memorandum of association
S 3 – limited and unlimited companies
S 4 – private and public companies
S 58 – public limited companies – must have ‘plc’ in the name
S 761 - public companies need trading certificates
S 762 – procedure for obtaining a trade certificate
S 763 – authorised minimum to get a trade certificate
Listed companies = companies that have shares being traded on the stock market
**limited means that the liability of the shareholders is limited – not the liability of
the company
Salomon – the liabilities weren’t in existence when he formed the company, so it was
acceptable that he was the principle creditor to his own company
...

Lee v Lee’s Air Farming – it’s possible to be a director of a company and contract
with yourself
...
In this case, they did
pierce the corporate veil
...
   
Extract – Slade LJ:
“It is not suggested that the arrangements involved any actual or potential illegality or
were intended to deprive anyone of their existing rights
...
As to condition (iii), we do not accept as a matter of law that the court is
entitled to lift the corporate veil as against a defendant company which is the member
of a corporate group merely because the corporate structure has been used so as to
ensure that the legal liability (if any) in respect of particular future activities of the
group (and correspondingly the risk of enforcement of that liability) will fall on
another member of the group rather than the defendant company
...
”
Chandler v Cape
69
...
A subsidiary and its
company are separate entities
...

70
...


Catamaran Cruisers v Williams
- employment case: personal dismissal assumed, not termination of contract for
services between companies

PIERCING THE CORPORATE VEIL - CONGLOMERATES
Agency or single economic unit ‘models’ cases
Smith Stone & Knights v Birmingham Corporation
-­‐ compulsory  purchase  –  entitlement  to  compensation  –  agency  assumed,  
referred  to  ‘Salomon  principle’  
DHN Food Distributors v Tower Hamlets
-­‐ compulsory  purchase  –  entitlement  to  compensation  –  single  economic  
unit  assumed  
Woolfson v Strathclyde Regional Council
-­‐ Scottish  case
...
 
Groups
See DHN Foods for an example where the group was regarded to be a ‘single
economic unit’
...

Therefore, a group does not always amount to a ‘single economic unit’
...

For instance, the Virgin group consists of so called horizontally integrated as well as
operationally wholly unrelated businesses
...
incorporation theory
Incorporation theory
Übersëring
– Freedom  of  establishment,  Art  43  and  48  TEC  
A company incorporated under Dutch law with German resident shareholders moved
‘central administration’ to Germany
...
Real seat theory overridden
...
IF NOT
REGISTERED IN THAT COUNTRY, THERE IS NO COMPANY – BIG
PROBLEM
Centros Case
– Freedom  of  establishment,  Art  43  and  48  TEC  
UK Ltd company formed by two Danes trading solely in Denmark
...

CAN'T TAKE PERSONALITY WITH IT INTO A DIFFERENT COUNTRY –
MOST COUNTRIES INSIST THAT COMPANIES COMPLY WITH THEIR LAWS
IN ORDER TO BE RECOGNISED
...
YOU WANT TO MOVE TO DENMARK –
REFUSED TO REGISTER BECAUSE OF PERCEIVED CIRCUMVENTION OF
THE MINIMUM CAPITALISATION RULE
HAS TO BE RECOGNISED AS A COMPANY IN OTHER MEMBERS STATES
Inspire Art Case C-167/01 (2003)
– Freedom  of  establishment,  Art  43  and  48  TEC  
ECJ rejected requirement for an addition to name in Dutch register indicating foreign
company
...
of min
...

The directors wanted to put something to the name saying that this was a foreign
company – this would have affected trading interests
NOT ALLOWED – NO RESTRICTION
Moving the real seat or registered office abroad – WANTED TO UNREGISTER
IN ONE COUNTRY AND RE-REGISTER TO ANOTHER COUNTRY
Daily Mail ECJ Case 81/87 (1988)
A public limited company applied to move their de facto seat to the Netherlands to
take advantage of more favourable tax regime
...
No
breach of Art
...

MOVING THE BUSINESS (MEANING UNREGISTERING AND THEN REREGISTERING) MEANS THE TOTAL DISSOLUTION OF THE COMPANY –
WINDING UP THE ASSETS – TRANSFERRING THEM TO ANOTHER
COMPANY – THIS INDUCES TAX
Cartesio Case C-210/06 (2008)

A Hungarian limited partnership (hairdresser) wanted to move its registered office to
Italy
...
The partnership was required to be wound up and re-registered in
Italy
...

REFUSED TO ENTER A FOREIGN SEAT – FORCED BUSINESS OWNER TO
DISSOLVE HIS BUSINESS – INDUCED TAX – PROHIBITIVE – EFFECTIVE
OBSTACLE TO MOVING
Cadbury Schweppes C-196/04 (2006)
Tax implications can be disregarded if establishment is a mere evasion and no real
connection with country of incorporation
...

Incorporation problem
Current European Forms of Incorporation
Societas Europea (SE)
Group of companies
European Co-operative Society (SCE)
Further current Proposals:
European Private Company (SPE)
European Foundation (FE)
European Mutual
European Association
Tax problem
Currently addressed through Double Taxation Conventions (DTCs)
Draft Common Consolidated Corporate Tax Base (CCCTB)
HASN'T TAKEN OFF – NOT POPULAR
THERE ARE A FEW PROPOSALS – EUROPEAN MUTUAL ETC, ETC
...
The
company will subsist even when the veil is pierced
...
The properties were held
by the company that H owned
...

- read the ‘Note’ at the start of the book by Sealy and Worthington, pages xvii - xxi
...

Moral issues within corporate structures
- Corporate structures escaping from employer’s liability
o Adams  v  Cape,  Chandler  v  Cape  
- Environmental impacts or accidents, involving int
...

Operational risks are minimised by use of the corporate structure
...
See the limitations proposed in Adams v Cape , read with DHN
Foods
...
 
 Duty  to  maintain  share  capital,  s
...
The contract contained in the articles of association is one of the original
incidents of the share
...
”
Jargon
– Please  distinguish  ‘share  capital’,  minimum  share  capital’    
– From  ‘minimum  capitalisation’  
Minimum capitalisation is a term taken from banking regulation and refers to the
operational part of the business
Share capital refers to the ownership, commitment and entitlement of the shareholders
Value
–
o
o
o
o

The  value  of  shares  
Shares  have  a  nominal  value  
They  have  a  book  value  
They  have  a  market  value  
And  they  have  a  ‘realisation’  of  value  =  turning  the  book  or  market  value  
into  cash  

The  value  of  a  company’s  assets  
Assets  have  a  book  value  
They  have  a  market  value  
The  have  a  value  according  other  standards,  such  as  accounting  and  
taxation  

Assets  are  subject  to  depreciation  

writing  off  
 
– The  value  of  a  company  
–
o
o
o

o The  assets  a  company  has  contribute  to  the  value  of  the  company  (balance  
sheet,  trade  and/or  tax)  
o  Goodwill/brand  &  reputation  also  has  value  
S 8 – Companies Act 2006 – Memorandum of Association
S 18 – Companies Act 2006 - Articles of Association
Ss 19 & 20 – Companies Act 2006 – Model Articles
Model articles – when applied – determine the relationships between the shareholders
S 658 Companies Act 2006 – Companies can’t acquire their own shares
Trevor v Whitworth
One of the main objects contemplated by the legislature, in restricting the power of
limited companies to reduce the amount of their capital as set forth in the
memorandum, is to protect the interest of the outside public who may become their
creditors
...

– SHARE  AS  A  MONETARY  INTEREST  AND  A  RIGHT  
Borland’s Trustee v Steel Bros & Co Ltd
...
The contract contained in the articles of association is one of the original
incidents of the share
...
”
In this case, shareholders were arguing that the shares gave them a property right
...
There was a clause in the
memorandum entitling the company to repurchase shares at a lesser value
...

EXCEPTION; a company can purchase shares but not in normal market conditions
Model article: https://www
...
uk/model-articles-of-association-for-limitedcompanies
memorandum of association:
https://www
...
uk/government/collections/memorandum-of-association-templatesfor-limited-companies

BE CAREFUL:
Shares in private companies are not tradeable through the stockmarket and are not
fungible assets
HOWEVER
Shares in plc’s can be listed and traded through the stock market and they are fungible
assets through certification
Shares are rights towards the company
...

(2) This means the care, skill and diligence that would be exercised by a reasonably
diligent person with—
(a) the general knowledge, skill and experience that may reasonably be expected of a
person carrying out the functions carried out by the director in relation to the
company, and
(b) the general knowledge, skill and experience that the director has
...
B
...
gov
...
2 million to the company
...

Negligence liability presupposes the breach of a duty of care
...
This
particular person had defrauded the others and caused the loss of £1
...


Q: Should all of the directors have to take responsibility, or just the person who did
wrong?
The liquidators sued all of the directors – they were relying on negligence liability –
the duty of care was assumed by directors when they took on directorship
...
v
...

Lindley M
...
in Lagunas: "If directors act within their powers, if they act with such
care as is reasonably to be expected from them, having regard to their knowledge and
experience, and if they act honestly for the benefit of the company they represent,
they discharge both their equitable as well as their legal duty to the company"
...

Facts: Mr D’Jan had signed a proposal form for an insurance policy which asked facts
about himself and his previous position as director of a defaulted company
...

Lord Hoffmann
...
”
The director was expected to act on his personal knowledge and skill and was
considered to be at fault in this case
...

HOWEVER::::::
It is difficult to always predict the level of liability that directors will be held to:
CA 2006, section 1157
Power of court to grant relief in certain cases
S 172 – Companies Act – Duty to promote the success of the company
Re Smith and Fawcett Ltd (this case happened before CA 2006)
Smith and Fawcett were the only shareholders and directors of their company
...

Fawcett died
...
It was HELD that
Smith was within his rights as a director
...
”
Re Brian D Pierson (Contractors) Ltd
Mr Pierson was reproached with being inactive when he should have done something
[because the company was slipping into financial difficulty] - he cannot be a ‘sleeping
director’
...

BBC news, 7 January 2014 Co-op Bank boss Flowers was right choice at time, says
the Financial Conduct Authority
http://www
...
co
...
 
o Clive  Adamson,  who  interviewed  him  in  2010  for  the  post  of  non-­‐executive  
chairman,  said  he  knew  Mr  Flowers  did  not  have  any  experience  in  banking
...
 
o Co-­‐op  Bank  was  rescued  last  year  under  a  deal  with  bondholders,  
o A  regulator  who  backed  the  appointment  of  the  now  disgraced  Co-­‐op  Bank  
chairman  Paul  Flowers,  has  said  the  right  decision  was  made  at  the  time
...
 
o Mr  Adamson,  director  of  supervision  at  the  Financial  Conduct  Authority  (FCA),  
was  speaking  to  the  Treasury  Committee
...

He was also chairman of the board of directors of the Aberdeen Railway Company
...
50 a ton
...

461 - per Lord Cranworth
It “may sometimes happen that the terms on which a trustee has dealt or attempted to
deal with the estate or interest of those for whom he is a trustee, have been as good as
could have been obtained from any other person - they may even at the time have
been better
...
The English authorities on this head are numerous and uniform
...
This is the very evil against which the
rule in question is directed, and here I see nothing whatever to prevent its
application
...
THE DIRECTOR MUST, HOWEVER, DECLARE
ANY INTERESTS, IN ORDER THAT THE COMPANY CAN MAKE AN
INFORMED DECISION
...
He took his leave from Ltd
...
The reason was to take up a lucrative engagement with the Eastern
Gas Board to design a gas depot in Letchworth
...

HELD: (Roskill J) He had ‘one capacity and one capacity only in which he was
carrying on business at that time
...
’
His defence that he had ‘spoken to the gas board in a private capacity’ was rejected
...
2m from Guinness for services rendered as
a solicitor
...
With his help and
guidance Guinness successfully acquired ‘Distillers Company’ which enhanced their
business
...
It had
not been so agreed
...
2m according to his position
as fiduciary when he agreed that sum with only one of the three directors
...
2 m count as his salary? Was he entitled to do this? No – he should've
discussed this and declared it with his fellow directors
...
The law didn't prevent this director from taking
£5
...


Contracting with interested directors
– CA  2006,  section  177  provides  for  a  disclosure  of  the  interest  of  any  
director
...
   
–

The  company  is  supposed  to  be  aware  of  the  risk  they  are  taking
...
 

REMEDY AVAILABLE TO A COMPANY: MAY AVOID A CONTRACT WITH
AN INTERESTED DIRECTOR
S 239 – Companies Act 2006 – Ratification of acts of directors
PROPER PLAINTIFF RULE
Foss v Harottle
Height of the industrial revolution – rich/poor divide
...

Things went wrong – there were a series of frauds committed by the directors and
architect
...

The plaintiffs were the minority shareholders
...

Sued for compensation for loss suffered through the fraud
...

HELD: plaintiffs didn’t win: the most important part of this course: the separate legal
personality of the company
...
The breach of the duty in question was the defendant’s duty
to do what was best for the company
...
The
proper plaintiff for this interest would have been the company
...

Consequences of this case – it set the scene for the next 100 years: the court came up
with a number of exceptions to the proper plaintiff rule
...

o
Direct United States Cable Company Ltd (DUSCC)
o
Mr John Pender had bought 1000 shares
...
56: if a member has more that ten votes, the member shall have one vote
for every bundle of ten, but not more than 100 votes
...
“the company shall not be affected by notice of any trust
...
They were like proxies
...
”
Nowadays, this would involve questions of competition law
...
He and the other directors along with
some shareholders opposed this motion and proposed an amendment
...
Lushington’s motion wasn’t adopted – minority – can the minority stop this
decision and therefore stop the merger?
The chairman effectively refused to register it
...
Mr Lushington refused to record the vote
relying on the articles of the company
...

–
Plaintiffs were Mr Pender AND the company
...
”
–
Lord Jessel confirmed that the company was entitled to appear because it was
clear that the majority would have supported the action and no separate general
meeting - which required 3 weeks notice- was necessary in order to provide justice
–
But there is another ground on which the action may be maintained
...
Pender for himself
...
That has nothing to do with
the question like that raised in Foss v Harbottle and that line of cases
...
”
–
The judge is comparing this with a property right – by becoming a
shareholder, the shareholder gets voting rights and these cannot be taken away
...
I object to that modification
...
The summons will stand over till
the trial or further order, with liberty to either party to call a meeting
...

Eventually they fell out over the acquisition of a ship – the United Empire
...

One of the directors was selling the ship to the company
...
Minority shareholder wanted to get the
court to reject the contract
...
Minority
shareholder were worried because they felt that they had lost control of the company
...
Confirms the Pender case
...
“ It is convenient to note at this stage some of the matters discussed
in the report
...
The law relating to the circumstances in
which such proceedings could be brought - the exceptions to the rule in Foss v
Harbottle (1843) 2 Hare 461 - was described as "rigid, old fashioned and unclear",
and "inaccessible save to lawyers specialising in this field because, to obtain a proper

understanding of it, it is necessary to examine numerous reported cases decided over a
period of 150 years" (paragraph 1
...
“
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
S 994 – Companies Act 2006 – Petition by company member
per  Lord  Hoffman,  this  was  the  first  case  to  test  the  meaning  of  ‘unfairly  
prejudiced’  in  section  994  of  the  CA  2006  (or  rather  its  predecessor)  
 
–
Pectel Ltd
...
Mr Philips was the sole
shareholder and director and employed Mr O’Neill
...
Negotitations took place about increasing
the 25% stake to 50% but no agreement was made
...
Mr
...

–

–
–

Mr O’Neill had succeeded in the Court of Appeal
...
 Remedy  under  s  
994  claiming  he  had  been  unfairly  treated  –  difficult  to  invoke  –  no  
successful  cases  

` Anderson v Hogg
Another unsuccessful case trying to use s 994
...

Courts don’t want to interfere with the decisions of the company

---