Separate Legal Personality

Front 1

Saloman v Saloman (1879)

Back 1

Salmon incorporated his company. 20,007 total shares were delegated as such: Salmon (20,001) and friends/family (6 remaining shares, 1 each)

Later created a debenture for £100,000, Salmon defaulted.

Front 2

Salmon v Salmon:

The result

Back 2

Claimant attempted to argue to piece the corporate veil by fraud. Saloman had not committed fraud, he had genuine motive in good faith. HOL upheld: the company is it’s own separate entity, Saloman cannot be made personally liable.

Front 3

Salmon v Salmon:

Judgement

Back 3

Halsey LJ: once a company is incorporate, they are “to be treated as an independent person with their own rights and liabilities”. Holding the large majority of shares did not make the company Saloman’s.

Front 4

Salmon v Salmon:

Judgement

Back 4

Halsey LJ: once a company is incorporate, they are “to be treated as an independent person with their own rights and liabilities”. Holding the large majority of shares did not make the company Saloman’s.

Front 5

Saloman principle: not invincible

Back 5

The courts can set aside the “corporate veil” in the name of justice.

Front 6

Daimler Co. v Continental Tyres & Rubbers Co. (HOL)

Back 6

The veil was “pierced” to identify the enemy. The company was found to be a mere “facade” or “sham device” for German spies to infiltrate with during World War 2.

Front 7

MacDonald, Dickens and Mackline v Costello

Back 7

CoA upheld SLP.

The contract between company and contractor were between only them and not the directors.

Insolvency was a default risk that contractors should have been aware of.

Front 8

Lubbe v Cape (2000) HoL

Back 8

“Forum principle” - it was held the over 3,000 personal injury claims brought against the South African subsidiary could be referred under London’s jurisdiction. It was easier to establish evidence and better expert evidence.

Out of court settlement made instead.

Front 9

Piercing the veil:

Sham devices

Back 9

Where the company was created or wound up for the purposes of committing fraud i.e. defrauding creditors, the veil can be pierced.

Front 10

Gilford Motors v Horne (1933)

Back 10

Horne was subject to trade restrictions upon leaving his first company. He created a company with shareholders consisting of employees as directors and shareholders to avoid the restriction.

Held: a sham device

Front 11

Jones v Lipman (1962)

Back 11

To avoid specific performance, a new company was created for the initial company to transfer property to - thus the order was unenforceable.

Held: a mask or a “sham device”

Front 12

Trustees AB v Smallbones (2001)

Back 12

£39mill. pounds found missing from the initial company and the newer company I Ltd received £20mil. This found to be fronted by S (cl.company’s former managing director. Veil needed to be pierced to prove that receipt by I Ltd was receipt by S.

Front 13

Trustees AB v Smallbones

Back 13

Andrew Moritt VC: there “must be impropriety linked to use of the company structure to avoid/conceal liability.

Held: company was a means for S to breach his duties and avoid liability - was liable.

Front 14

Multinational Companies:

Adams v Cape (1996)

Back 14

In the case of multinational companies consisting of a parent and subsidiaries, each company (regardless of status) is treated as their own personally entity. Slade LJ rejected Lord Denning’s single economic unit argument.

Also considered were “mere facade” and “agency principle.”

Front 15

Single Economic Unity: DHS Food Distributors v Towers Hamlet (1976)

No longer good law

Back 15

Lord Denning stated that subsidiaries and parents are bound by “hand and foot.”

Further added that the subsidiaries are to listen to the orders of their parents and operated alongside them.

Front 16

Agency principle:

Back 16

If it can be shown that the subsidiary plays no more of a significant role other than to act as an agent or “day to day” control was managed by the parent comapny.

Front 17

Single Economic Unity: DHS Food Distributors v Towers Hamlet (1976)

No longer good law

Back 17

Lord Denning stated that subsidiaries and parents are bound by “hand and foot.”

Further added that the subsidiaries are to listen to the orders of their parents and operated alongside them.

Front 18

Agency principle:

Back 18

If it can be shown that the subsidiary plays no more of a significant role other than to act as an agent or “day to day” control was managed by the parent comapny.

Front 19

Example of Agency:

Re FG (films) Ltd (1953)

Back 19

Court held the movie produced could not be said to be a “UK film” thus the firm could not be entitled to certain tax advantages. The sub. had only £100 capital, no premises nor staff. Contributions so insignificant it could not be regarded as anything other than an agent/nominee.

Front 20

Example of agents:

Chandler v Cape (2012)

Back 20

These factors are considered in deciding agency:

i) the P and S are in the same line of work, ii) the Parent knew of the unsafe practices of the S and iii) the parent knew they’d be held responsible for it.

Based on the concept of DoC - could not be regarded as “piercing the veil”

Front 21

Non-commercial Transactions:

Prest v Petrodel Services (2013)

Back 21

The court is unwiling to pierce the veil in non-commercial cases.

The D transferred his property to the company to render the divorce proceedings ineffective. The court did not pierce the veil to retrieve the property for the wife, but rather established a resulting trust held by the company for the wife. She was thus entitled to the property.

Front 22

Piercing the veil: Statutory

Back 22

s.213 - fraudulent trading

s.214 - Wrongful/Negligent Trading

s.216 - Phoenix Companies

Front 23

Piercing the veil: Statutory

Back 23

s.213 - fraudulent trading

s.214 - Wrongful/Negligent Trading

s.216 - Phoenix Companies

Front 24

s.213 - Fraudulent trading

Back 24

Imposes liability on any person (not only members) who knowingly carries on the company’s business intending to defraud creditors and other fraudulent purposes, in the course of insolvency.

Action brought by liquidator.

Front 25

Re Gantham (1984)

Back 25

Defendant company took up multiple loans knowing they could not be repaid.

Held: intention to defraud - question of fact - or at least, no honest belief that the liability will be discharged.

Front 26

Re Continental Assurance Co. of London (2001)

Back 26

It is appreciated some companies, in making a hard decision to liquidate or continue, have a genuine belief that the company can “turn the corner” and took loans to that effect.

Not liable if there is no dishonest belief / intention. i.e. paying only certain creditors to deny paying specific ones.

Front 27

s.214 CA’06 - person can be liable to contribute to the company’s assets.

Back 27

Two steps:

s.214(2)(b) - defendant knew or ought to have known liquidation was unavoidable.

s. 214(3) - defendant had not taken the reasonable steps to minimize the losses of liquidation.

Front 28

Re Produce Marketing Consortium No 2 (1989)

Back 28

Audit accounts revealed a decline - no overdrafts, excess liabilities over assests and a trading loss by 1984. Director admitted he knew but justified himself saying continued trading enabled a realisation of the company’s perishable goods.

Front 29

Re Produce Marketing No2 (1989)

Back 29

Held: directors liable

They should have concluded that liquidation and winding up was inescapable from accounts as bad as they were.

They must have taken reasonable steps to minimize loss as a person exercising skill, knowledge and experience expected from that position.

Front 30

Re Continental Assurance Co. of London (2007)

Back 30

The director had acted reasonably in calling for a “Crisis Meeting” to explain to the staff the company’s position - majority agreed to continue trading.

Held: not liable - director had taken the reasonable step to minimize loss - majority rules, thus not liable for following.

Front 31

Re Produce Marketing

Back 31

The amount ordered from the dependant to contribute depebds on the “amount which could be seen to have been depleted by the director’s conduct that gave rise to liability.

Front 32

V Finch, “Corporate Insolvency Law: Perspectives and Principles” 2009

Back 32

“Fairness in liquidation demands that the general body of creditors be protected from dispositions of the company’s assets in the period leading up to liquidation which confer improper advantages on certain creditors or other parties” - should be protected from wrongful tradings which benefit e.g. the fraudulent party.

Front 33

s.216 - Phoenix Companies

Back 33

Individual will be liable, if within 5 years of insolvency, creates or is involved in the creation of a new company under the same name as the insolvent company.

Front 34

Company Law Review:

Back 34

Dubbed “Phoenix Companies”

These newer companies exploits the old company’s assets (buying them at undervalue) and exploits their goodwill and business opportunities. A cheeky method to allow directors to continue on their business.