Briefcase on Company Law

MIchael Ottley

• Publisher: Routledge-Cavendish
• Year: 2002
• eBook ISBN: 9781135337902
• Edition: 2
• Topic: Law
• Subtopic: Financial Law
• Index: Law

The Briefcase series is designed specifically with the time-pressed student in mind. It provides concise case summaries within each subject area of an undergraduate law degree, accompanied by relevant legislation. A handy reference tool, the book assists the reader to commit the content of each subject to memory.

This title covers the four main areas of company law: the constitution, formation and personality of a company; corporate governance; corporate finance; and insolvency and company charges.

The second edition has been updated to include recent important cases, including the House of Lords decision in

• Johnson v Gore Wood - (minority shareholder action)
• Phillips v Brewin Dolphin Bell Lawrie Ltd - (transactions at an undervalue)
• O'Neill v Phillips - (unfair prejudicial conduct)
• Williams v Natural Life Health Foods Ltd - (liability in negligence)
• the Privy Council decision in Agnew v Commissioner of Inland Revenue - (company charges).

Part 1: Constitutional Issues

1 Corporate Personality

1.1 Doctrine of corporate personality

Salomon v A Salomon & Co Ltd (1897) HL

The appellant, Mr Salomon, was a boot manufacturer in the East End of London. He had been a successful sole trader for over 30 years. The respondent company was formed to purchase and take over the business of Mr Salomon with seven subscribers (the requisite statutory minimum in those days). These subscribers were Mr Salomon who owned 94 of the shares and six members of his family who owned one share each as nominees for Mr Salomon. The purchase price for Mr Salomon's business was £39,000. Mr Salomon was to receive £20,000 out of future profits as they came into the company, but he took this sum in the form of £10,000 worth of fully paid shares in the company and a debenture worth £10,000 secured over the company. The balance of the purchase price was made up by the company's discharge of the sole tradership's debts and liabilities at the time of its transfer. During the year after its incorporation, the new company encountered trading difficulties. The appellant attempted to keep the company going by lending it money raised by way of a mortgage of his debenture, but it was to no avail and the company went into liquidation. When the mortgagee of the debenture brought enforcement proceedings, the liquidator argued that the debenture was invalid as it had been originally obtained through the appellant's ‘fraud’, in the sense that the formation of what was in effect a one man company amounted to a fraud. The court at first instance and the Court of Appeal found for the liquidator in that they refused to recognise the existence of A Salomon & Co Ltd as a separate legal person. They saw the company as nothing more than Mr Salomon's nominee, agent or trustee.

Held On appeal, the House of Lords unanimously reversed the findings of the lower courts. Lord Halsbury LC said that so long as the statutory formalities for forming and registering an incorporated company had been complied with (and they had) then the motive of those forming a company was irrelevant to the question of its existence as a legal person separate from its members. It makes no difference to this rule that one member owns the beneficial interest in all or substantially all of the company's shares. The company exists at law and is a being entirely separate from those who own its shares or run its business.

Macaura v Northern Assurance Co (1925) HL

The appellant, Mr Macaura, owned several timber estates in Ireland. He sold them to a company in return for the allotment to him of nearly all of the company's share capital, the remainder of the company's share being held by nominees for his benefit. He was also a substantial creditor of the company. Insurance policies were effected covering the timber in his name. When fire subsequently ravaged the timber he brought an insurance claim on the policies.

Held The claim failed. He had no insurable interest in the timber. The timber was the property of the company not of him; this was a consequence of its separate legal personality. The fact that Macaura was the only beneficial shareholder in the company and was its major creditor (so that he had a very real economic interest in the timber) made no difference for it was not his shares or the debt owed him which were exposed to the fire, it was the timber and that was the property of the company.

Lee v Lee's Air Farming Ltd (1961) PC

The appellant was the widow of Mr Lee, sole director and holder of 2,999 of the 3,000 shares in the respondent company. He had been employed by the company too and was killed in an accident in the course of his employment. The question arose as to whether he was a ‘worker’ for the company within the meaning of New Zealand worker compensation legislation, in which case his widow was entitled to compensation from the company. The New Zealand Court of Appeal had ruled that he was not since he was de facto also the employer in that for all intents and purposes he really was the company.

Held The appeal was allowed. It was a necessary consequence of the separate legal personality of the company that contractual relations could exist between the deceased Mr Lee and the company. They were two separate legal entities and there was nothing to prevent the person who is in sole control of a company from, at the same time, being employed by it.

1.2 Lifting the veil of incorporation

1.2.1 Fraud

Gilford Motor Co v Horne (1933) CA

The respondent, Mr Horne, had contracted with the appellant, the Gilford Motor Company, not to solicit its business customers when he left its employment. After he had ceased to work for the appellant, Mr Horne formed a company which carried on a competing business and began to solicit the appellant's customers. Mr Horne was neither a director nor a shareholder in this company – his wife and an employee of the company (who, incidentally, called Mr Horne ‘Boss’!) were the only directors and shareholders.

Held An injunction to restrain further breaches of Mr Horne's covenant was granted against both Mr Horne and the new company. The Court of Appeal saw the company as nothing more than a sham, a stratagem to circumvent the covenant to which Mr Horne was a party. Mr Horne was effectively carrying on business through the agency of this company.

Jones v Lipman (1962)

The defendant had contracted to sell land to the plaintiff. The defendant was now trying to prevent the plaintiff obtaining specific performance of the contract so he conveyed the land to a company formed for this express purpose and owned and controlled by him. The defendant argued that the company, as a separate legal person, was a bona fide purchaser for value without notice of the land and so specific performance could not now be ordered over the land.

Held The judge ignored the corporate veil for the purposes of the defendant's argument. He followed the reasoning in Gilford v Horne and ordered specific performance against both the defendant and the company which now held the land.

Re H and Others (Restraint Order: Realisable Property) (1996) CA

One hundred per cent of the shares in two family companies were owned by the three individual defendants in this action, and a fourth individual who intervened in the proceedings. The three defendants were the subject of proceedings brought against them by the Commissioners of Customs and Excise relating to excise duty fraud allegedly committed by the defendants through the companies. The Commissioners had obtained orders restraining the defendants from dealing with their realisable property. A receiver was appointed over the property concerned which included shares in the two family companies and motor vehicles and stock belonging to the companies. The defendants and intervenor appealed against the terms of the order arguing that it infringed the principle of separate corporate personality and that the company's assets were being wrongly treated as their assets.

Held The Court of Appeal rejected the appeal, holding that this was an appropriate case for lifting the veil of incorporation of the companies concerned and treating their assets as inuring to the defendants personally. The evidence pointed to the use of the corporate form as a masquerade for illegal and criminal activities (evasion of excise duty) – the companies were controlled by the defendants who had benefited substantially from company money. Following the dicta in Adams v Cape Industries plc, ‘the court will lift the corporate veil where a defendant by the device of a corporate structure attempts to evade (i) limitations imposed on his conduct by law …’. The Court of Appeal affirmed the orders made which treated the companies’ assets as belonging to the defendants.

Ord v Belhaven Pubs Ltd (1998) CA

The plaintiffs took a 20 year lease of a public house from the defendant, B Ltd, a company which was part of a group of companies. The lease was based on a number of representations relating to the turnover and profitability of the pub, which the plaintiffs later claimed were false. After the plaintiffs began legal proceedings, there was a restructuring within the group of companies, with the result that B Ltd's substantial assets were transferred to A plc, the parent company, at net book value. As B Ltd no longer retained any assets to meet any damages award, the plaintiffs sought to have A plc substituted for B Ltd in the legal proceedings, arguing either that the arrangement amounted to a sham or façade, or that A plc and B Ltd were to be regarded as one unit.

Held In reversing the first instance decision, the Court of Appeal held that, in accordance with the principles laid down in Adams v Cape Industries plc (1990), the defendant company, B Ltd, could not be construed as a mere façade in respect of the transfer of its assets. The transfer was undertaken without any intention to prejudice the plaintiffs. The motive for the reconstruction had been based upon an understandable business decision, which had been undertaken as a consequence of a decline in the property market. The Court of Appeal also held in relation to groups of companies (see 1.2.2) that even where a strong economic unity exists between a group of companies, this is not necessarily a ground for lifting the veil of incorporation. Hobhouse LJ said:

The approach of the judge in the present case was simply to look to the economic unit, to disregard the distinction between the legal entities that were involved and then to say: since the company cannot pay, the shareholders [of A plc] who are the people financially interested should be made to pay instead. That of course is radically at odds with the whole concept of corporate personality and limited liability and the decision of the House of Lords in Salomon v A Salomon & Co Ltd.

Yukong Lines Ltd of Korea v Rendsburg Investments Corp of Liberia (No 2) (1998)

The issue in this case was whether Y, the controlling shareholder of the defendant company, R Ltd, should be held personally liable to the plaintiff company for breach of a charterparty, which the plaintiff company had entered into with the defendant company. During the course of the legal action, the defendant company transferred the majority of its assets to another company, also controlled by Y, so that the defendant company would not be in a position to meet any damages award for breach of contract.

Held The judge refused to lift the veil of incorporation. The charterparty was not entered into with a view to defeat any pre-existing contractual obligation, nor had the charterparty been entered into by the defendant company as agent of Y. Both Y and the defendant company were separate legal entities. The court also confirmed the view of the Court of Appeal in Adams v Cape Industries plc (1990), that there is no exception to Salomon v Salomon (1897) based on ‘the interests of justice’.

Trustor AB v Smallbone (No 2) (2001)

The first defendant, in breach of his duty as managing director of the claimant company, transferred substantial sums belonging to the claimant company to I Ltd, which was the second defendant and which was controlled by the first defendant. The claimant company claimed that it could bring proceedings against I Ltd for recovery of the transferred funds, on the basis that I Ltd was a façade, set up solely as a vehicle for receiving the transferred funds.

Held The claimant company's action could succeed, as I Ltd was a façade or device, designed to avoid the personal obligations imposed on the first defendant. The receipt of the monies by I Ltd was to be regarded as monies received by the first defendant.

1.2.2 Groups of companies

DHN Food Distributors Ltd v Tower Hamlets London Borough Council (1976) CA

DHN Food Distributors Ltd, the parent company in the DHN group, owned and ran a food distribution business. It wholly owned two subsidiary companies: Bronze Investments Ltd (which owned the land used in the business) and DHN Food Transport Ltd (which owned the lorries). The same directors were common to all three companies. The local authority issued a compulsory purchase order over the land pursuant to which statutory compensation was payable for: (1) the value of the land; and (2) disturbance to any business conducted. The local authority paid compensation for the land value to Bronze Investments Ltd, but nothing at all with respect to business disturbance since it did not own or carry on any business. The parent company owned and carried on the business but was separate in law and was not subject to the compulsory purchase order and hence, argued the local authority relying on the doctrine of separate corporate legal personality, not entitled to any compensation at all.

Held The Court of Appeal thought this an artificial and unfair application of the doctrine of corporate personality. Lord Denning lifted the corporate veil and said that compensation for business disruption should be payable to DHN Food Distributors Ltd. He treated the group as one entity for the purposes of that particular statute. This decision was carefully confined to its facts and does not lay down any principle generally applicable in group situations.

Lonrho Ltd v Shell Petroleum Co Ltd (1982) HL

The appellant company, Lonrho Ltd, had brought an action for discovery of documents which it claimed were under the control and in the power of the respondents in that they were held by overseas subsidiary companies wholly owned and controlled by the respondents.

Held The appeal was disallowed and Lonrho's action failed. The House of Lords restated the strict principle that even within seemingly closely interconnected groups of companies the individual companies still enjoy separate corporate personality in law and the courts will not lightly disregard that and set aside the veil of incorporation. However, they did leave open the possibility of doing so where th...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Acknowledgments
• Table of Cases
• Table of Statutes
• Part 1: Constitutional Issues
• Part 2: Corporate Governance
• Part 3: Corporate Finance
• Part 4: Insolvency