Company Law Revision Part 2: Model Essays

1. What general principles, if any, can be derived from those cases where the courts have 'pierced the corporate veil'? Discuss.

Piercing (or lifting) the Corporate Veil

Gilford Motor Co Ltd. v Horne [1933] Ch 935

Jones v Lipman [1962] 1 WLR 832

DHN Food Distributors v Tower Hamlets LBC [1976] 1 WLR 852

Woolfson v Strathclyde Regional Council 1978 SLT 15

Adams v Cape Industries [1990] 2 WLR 657 -

Creasey v Breachwood Motors Ltd [1993] BCLC 480

Re Polly Peck International [1996] 2 All ER 433

Ord v Belhaven Pubs Ltd. [1998] BCC 607

Connelly v RTZ Corporation Plc [1998] AC 854 [HL]

Lubbe v Cape Industries Plc [2000] 1 WLR1545 [HL]

Williams v. Natural Life Health Foods Ltd [1998] 1 BCLC 689

Standard Chartered Bank v Pakistan National Shipping Corp. [2003] 1 All ER 173

Company law sometimes effectively ignores or bypasses the separate legal personality of the company (Salomon doctrine) and attaches liability directly to individuals within the company. This area has been mostly developed as judge made law. The courts have laid down situations in which separate legal personality will be disregarded.

Lifting the veil

Per Adams v Cape (see below): 3 grounds for veil lifting:

(a) Statutory requirements, or contractual documents

Eg. tax legislation; accounting rules

(b) Faade or Sham

Gilford Motor Co Ltd. v Horne [1933] Ch 935

Jones v Lipman [1962] 1 WLR 832

Adams v Cape Industries [1990] 2 WLR 657

Asbestos, subsidiary companies used to shield liability from the apparent company for the sale of the potentially dangerous asbestos.

Slade L.J. said that a member of the corporate group was perfectly entitled to use the corporate structure in such a way: as to ensure that the legal liability (if any) in respect of particular future activities of the group ... will fall on another member of the group rather than the defendant company

The distinction between avoiding existing, and future, liabilities

Must the company be formed to evade the liability, or is it enough that it is subsequently used for such?

Raja v Van Hoogstraten [2006] EWHC 2564 (Ch)

(c). Agency

Express Agency:

Implied Agency

Re FG (Films) [1953] 1 WLR 583

Smith, Stone and Knight v Birmingham Corporation [1939] 4 All ER 116

(d) Single economic entities: the problem of corporate groups

Lonrho v Shell Petroleum [1980] QB 358; [1980] 1 WLR 627 HL

DHN Food Distributors v Tower Hamlets LBC [1976] 1 WLR 852

The SINGLE ECONOMIC UNIT exception was first expounded in DHN

Woolfson v Strathclyde Regional Council 1978 SLT 15

Adams v Cape Industries [1990] 2 WLR 657

Creasey v Breachwood Motors Ltd [1993] BCLC 480

Re Polly Peck International [1996] 2 All ER 433

Ord v Belhaven Pubs Ltd. [1998] BCC 607

EC Draft 9th. Directive on Conduct of Groups of Companies

(e) The corporate veil and tortious claims:

Why claims in tort are problematic.

Connelly v RTZ Corporation Plc [1998] AC 854 [HL]

Lubbe v Cape Industries Plc [2000] 1 WLR1545 [HL]

But compare:

Williams v. Natural Life Health Foods Ltd [1998] 1 BCLC 689

Standard Chartered Bank v Pakistan National Shipping Corp. [2003] 1 All ER 173

(f) criminal law

eg. health and safety at work provisions

eg. environmental regulations

(g) statutory creditor protection

Insolvency Act 1986:

s.213: fraudulent trading

any person who is knowingly party to carrying on the business of the company with intent to defraud creditors can be made liable to contribute towards the assets of the company

s.214: wrongful trading

if a director fails to take all reasonable steps to protect the companys creditors once he knows, or ought to know, that insolvency is inevitable, he can be made liable to contribute towards the assets of the company.

(h) Contractual liability

Intro:

Since Salomon[footnoteRef:1] in which the dual doctrines of; [1: Salomon v. Salomon & Co [1897] AC 22]

i) separate legal personality of the company and

ii) limited liability of shareholders of companies, this has been an issue in English company law.

Greater so, now that many companies are part of larger corporate groups, there is a greater risk that companies will shield themselves from any potential liability by masking the activities of subsidiaries and parents through this structure. The onus has been on balancing the competing concerns of precedent and producing an outcome that is just

At times though the Salomon doctrine will be sidestepped by a statute anyway, as shown by taxation legislation; s.399 CA 2006 provides that the parent companies are under a duty to produce group accounts..

Thus, there is sometimes a need to disregard Salomon doctrine and pierce the corporate veil.

The arguments against are threefold: single economic entity, facade and agency;

However, this has generally been limited to only the most extreme cases, in which it has been demonstrated that the corporate group is a mere faade.

However, the current approach has been described as inadequate, and commentators such as Marc Moore have propounded alternatives, more onerous on incorporators which also have a strong basis in the existing case law the genuine ultimate purpose or GUP test

Slade LJ recognised three exceptions in Adams v. Cape which I shall discuss below:

Para 1 Single Economic Entity:

This is an argument in favour for piercing the veil in certain conditions.

The example provided:

Company A has subsidiary B

Company B runs farming business

Company A owns land on which business is run

Government makes a compulsory purchase of land; compensation by statute only provided for in respect of disturbance to business, which is disturbed.

This provides a difficulty; as in reality they are one business (parent + subsidiary) de facto single economic unit; but de jure they may not be recognised as such.

This exception was first expounded in the DHN case.

The DHN case

Para 2 Agency:

Smith Stone & knight v. Birmingham Corp.

The autonomous identity of the company will be disregarded on the basis of the agency exception, only where the subsidiary is completely and utterly under the control of its parent to the extent that the subsidiary cannot be said to be carrying on its own business in distinction from its parent.

This has been recognised to be a very narrow exception; single economic unit not enough.

In the Birmingham Corp case, the parent purchased a subsidiary; which had initially been an unincorporated company; it was then registered and subsequently treated as merely a department of the parent company.

The parent had full and exclusive access to the subsidiarys books.

The subsidiary was allowed to occupy the parents premises for no consideration

The subsidiary employed no other staff than a manager

The only evidence that the subsidiary was distinct was the separate name on the stationary and premises

As this case has a very strange and particular set of facts, it isnt the most satisfactory precedent as it is unforeseeable that many cases will arise in the future with this sort of situation.

Para 3: Faade:

This will arise in cases were an existing incorporated or unincorporated trader uses a company as nothing more than an artificial device for the purpose of shielding themselves from pre-existing statutory, contractual or tortious liabilities.

The typical sets of circumstances that will trigger this sham exception to Salomon are exemplified in two well-known 20th century cases:

Gilford Motor Co v. Horne:

The defendant in this had a contract with his previous employer that prevented him from engaging with former clients for business

He created a new company, for the mere purpose of engaging with his previous customers and competed with his former employers.

The CA discarded the corporate veil, which had the effect of allowing the plaintiff to pursue injunctive relief against both the defendant and the company through which he had been trading in breach of his contractual undertaking.

Of note, because 3 members of the bench agreed that the company was a mere cloak or sham its only purpose being to shield the defendant from any potential liability that would arise from his breach of contract.

This case was followed at first instance by Jones v. Lipman

Essentially similar set of characteristics to Gilford

The D entered into a contract with the plaintiff to transfer land to him, D then changed his mind. Created a new company, to transfer the land to and put it beyond the reach of an action for specific performance.

Russell J refused to recognise the existence of the corporate veil under these circumstances and instead made an order for specific performance against both the Defendant and the company

Slade LJ in Adams insisted that sham or faade be the only general basis for piercing the corporate veil.

Moore argues that Slades view is understandable from a practical perspective

Clearly defines and therefore minimises the range of possible cases in which the court may pierce the corporate veil; this presents a situation where the integrity and autonomy of the corporate form gains the paramountcy; whilst not neutering the Courts potential responses to the most morally reprehensible and economically harmful abuses of the corporate form by traders.

By focusing on concrete doctrinal principles over potentially subversive considerations of fairness or policy he guarded against the likely floodgates problem consequent upon the moralisation of the issue of piercing the corporate veil.

Certainty though, Moore argues, comes at the cost of the development of a more advanced set of legal principles to deal with the on-going problem of the corporate veil.

The test that remains means that a wronged plaintiffs outcome in a case will hinge upon an arbitrary, mechanical and morally dubious test as to whether Ds actions can be defined as malicious and dishonest evasion of liabilities via a sham company (Gilford and Jones) or else as shrewd and opportunistic avoidance of potential liabilities via ade facto rea company as in Adams.

Conclusion

Despite difficulties, where it is sometimes hard to penetrate a corporate group in which there are numerous subsidiary companies; it is recognised that at times the Salomon doctrine does not provide a just result in cases.

There have been many attempts at finding a conclusive exception to the Salomon doctrine, such as the now defunct interests of justice test employed in the Creasey v. Breachwood Motors case.

This case also has difficulties -

Slade LJ seemed to favour the sham test, but as mentioned above; it is not complete.

The Moore alternative of the GUP would be better, but would it be possible to implement?

This question requires students to consider the nature of and grounds for piercing the corporate veil. It has both a descriptive part where it is necessary to explain clearly what the current law says in relation to piercing the veil and a prescriptive/normative part (i.e. the latter is the critical analysis bit). It is important to examine both parts of the question.

Adams v Cape needs to be discussed along with the other significant decisions. Agency, single economic entity, facade/sham argument need to be made.

2. Articles of association rights given to a member in his capacity as a director are enforceable. Discuss

Company Constitution and Articles of Association

This question requires having awareness of the nature of articles and constitution. Whether a shareholder who is a director can invoke the application of the articles in a dispute arising out of directors rights? Relevant case law (e.g. Beattie v Beattie, Ely v Positive Government Security Life Assurance Co Ltd., etc) need to be discussed.

Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286

Wood v Odessa Waterworks Co. (1889) 42 Ch D 636

Hickman v Kent and Romney Marsh Sheep-Breeders Association [1915] Ch 881

Beattie v E & F Beattie Ltd [1938] Ch 708

Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88

The Constitution of a Company

The Articles and Altering the Articles

The Contractual Nature of the Articles

The Effect of Shareholder Agreements

The Object Clause and the Ultra Vires Rule

We shall be discussing the nature of the constitution of a company and the significance of shareholder agreements.

Articles of association ss. 17 and 29 CA 2006

Key constitutional document.

Supplemented by resolutions and shareholder agreements, together creating a Constitution of a company.

Companies Objects S. 31(1) CA 2006

CA 2006 removed the requirement to have an objects clause.

Unlimited capacity

Alteration of the Constitution

Alteration of articles

s. 21(1) CA 2006

Articles as evidence of term of extraneous contract with third party:

s. 33 CA 2006 (re-enacts its predecessor CA 1985 s. 14)

Re New British Iron Co ex parte Beckwith (1898) 1 Ch 324

Ss 21-27 CA 2006 Alteration of Articles of Association

A company may amend its articles by special resolution.

Allen v Gold Reefs of West Africa Ltd [1901] 1 Ch 656

But the alteration must actually have a discriminatory effect and be shown to be in bad faith

Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286

Russell v Northern Bank Development Corporation Ltd [1992] 1 WLR 588

s. 21-27 CA 2006

Entrenched provisions of the articles s. 22 CA 2006

See Draft Model Articles for Private Companies Limited by Share, especially article 3

Shareholder Agreements, their use and effect & Members personal rights under the Constitution

S. 18 - Legal effect of Articles of association

The articles of association have replaced the memorandum of association as the key document in the companys constitution.

See also s. 20 CA 2006

See also s. 33 CA 2006 Effect of Companys Constitution

Shareholders may enforce the articles as a contract against the company and as against each other:

Wood v Odessa Waterworks Co. (1889) 42 Ch D 636

Hickman v Kent and Romney Marsh Sheep-Breeders Association [1915] Ch 881

However there is some controversy as to what types of right the Courts will enforce and some commentators argue that the shareholder must be suing as a member to enforce a right of membership rather than as an outsider in some other capacity to enforce a non-membership right. e.g. Beattie v E & F Beattie Ltd [ 1938] Ch 708 Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88

The line between shareholders rights and outsiders rights remains, despite the Salmon v Quin & Axtens Ltd [1909] AC 442 HL decision

3. A non-executive is considered independent when the board determines that the director is independent in character and judgment and there are no relationships or circumstances which could affect, or appear to affect, the directors judgement. Discuss.

Shadow Directors/Directors Duties & Regulating Directors

The question requires students to look at the nature of executive and non-executive directors and their independence. What are the responsibilities and liabilities of non-executive directors? Are they independent? Unfettered discretion argument should also be made.

4. Directors owe trustee-like duties and unless expressly allowed, they must not profit from their position. Discuss.

Directors Duties + Directors Profiting

Fiduciary Duty of the Director.

This question requires students firstly to consider the nature of directors duties. In this perspective they need to discuss the historical background. Here it may be good to argue briefly that directors were in the early 19th century trustees. Secondly, it is important to look at, very generally, the types of duties and finally discussion of no profit rule and no conflict rule.

Intro

Two strings:

There are different types of duty which the director owes

Common law duties (care and skill

Fiduciary duties (trustee-like)

Housed ss. 171-177 CA 2006

Should Directors profit?

The question highlights the duality of the role of the director; on the one hand they are the trustee of the company, protecting the assets of the beneficiaries. Whilst on the other as Lowry and Reisberg term it, they are expected to be the dynamic entrepreneur who turns the shareholders investments into greater rewards.

History

Types of Duties

No Profit Rule/No Conflict

The rule in Foss v. Harbottle (Unfair Prejudice)

History of the Role

This bifurcated nature of the role and its history goes someway to explaining why there is not a satisfactory and wholly accepted legal answer to the regulation of directors.

The Courts originally developed the directors duties; before they were codified in the CA 2006.

The

General Duties

S.170 CA 2006 sets out the Scope and Nature of the general duties

S.170(1) The general duties specified in ss.171-177 are owed by a director of a company to the company

S.170(3) The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director.

The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.