As a basic rule, companies havetheir own separate legal personality.
Both the common law and statues identifythat a company is legally separate from those involved. This is the idea that a company is a legallydifferent person from the members and those who invest in it. It means that thecompany is in association with its members rather than the members being thecompany. There are however, exceptions where the courts are prepared tooverlook the separate legal personality in what’s known as ‘piercing thecorporate veil’. This essentially means to overlook the separate legalpersonality and, where exceptions apply, hold members and directors liable forthe actions of a company.A company has a separate legalpersonality.
Liability for actions made on behalf of the company does not liewith the members and directors. The leading authority for this is Salomon vSalomon and Co Ltd1.The decision made by the Court of Appeal was overturned by the House ofLords; a company that is incorporated is a separate person with its ownindividual set of rights and liabilities.
The liquidator in this case arguedthat Salomon was liable for the liquidation costs because Salomon was an’agent’ of Salomon and Co Ltd. The Courtof Appeal first held that Salomon was liable; they overlooked the separatelegal personality. The House of Lords meanwhile, decided that, because the companywas incorporated, it was its own personality and thus the defendant was notliable for the insolvency costs.In 2013, thecase of Prest v Petrodel Resources Ltd & Others2provided a new insight into the law of legal identity and personality. Thedefendant and claimant were husband and wife going through divorce proceedings.As a standard, divorce law outlines that assets owned by the parties must beshared during the divorce. In this case it was the husband who owned asubstantial amount of expensive property. To avoid having to share this property,the defendant set up several companies and transferred his properties to thosecompanies.
Under divorce law, the defendant had no assets, they were owned bythe company, thus did not have to share any with the claimant. Broadlyspeaking, this makes sense. The company is its own legal personality andtherefore owns the properties, not the defendant. However, the supreme courtviewed this as a matter of company law also.
The decision to be made waswhether or not it was appropriate to pierce the corporate veil with regards tothe assets. Whether the properties owned by the companies should be transferredto the claimant. Out of this, Lord Sumption developed two principles; that ofevasion and of concealment. The important difference between the two is thatconcealment is legal whereas evasion is not.Concealment isthe act ‘in which a human being is seeking to conceal their involvement in theassets held by the company’3. The case example of this is Salomon4.The defendant created the company in order to move himself away from anyliability and pay out he may have to make if the company went bust. As ithappens the company did go bust and because Mr Salomon had created a companywith a separate legal personality, he was not liable.
Cases regarding concealmentare difficult to decide as it is hard to know where the line stands. On the otherhand, cases of evasion, are more significant to the veil. This occurs when thedefendant is trying to evade a legal liability such as the one in Jones vsLipman5.By giving the land to a company, the defendant was trying to avoid the order ofspecific performance thus leading to an evasion of legal liability. Prest6itself is also an authority to evasion. By transferring assets tocompanies, Mr Prest was evading the legal liabilities held under divorce law.In the leading judgment, Lord Sumption held that ‘the corporate veil may bepierced only to prevent the abuse of corporate legal personality’7.One would argue that in suggesting this he created an overarching rule for whenthe veil can be overlooked.
Before thedecision in 2013, but still applicable today, the courts followed traditional 2exceptions to the ratio in Salomon8.The first was agencies. This occurs when there is a relationship between anagent and a company whereby the agent has the authority to create legal bonds.For example, the contracts of sale, between a third party and the company.Usually this exception is based around 2 ideas. Firstly, when the company is anagent of a parent company and secondly, when a company is an agent of one ofits members. In Smith, Stone & Knight Ltd v Birmingham Corp9it was the former that applied; the parent company was allowed damages withregards to business carried about by an agency (daughter company) because theactions were on behalf of the parent company.
The secondtraditional exception is mere façade. This applies when the company in questionis a sham or a cover-up for the actions of the member(s). Members typicallycreate sham companies to avoid restrictions imposed by law and the rights ofclaims from third parties. In Salomon10,it was argued in the Court of Appeal that this was the case. The claimantsuggested that the defendants company was set up so that he could avoid payingout for the debt that he had incurred. The court of appeal agreed that thecompany was indeed a sham and that Salomon was liable for the debtbecause he was acting as an agent.
As mentioned previously, thisdecision was overturned and the House of Lords held that because the company wasduly incorporated it did have its own separate legal personality. Another caseexample is Jones v Lipman11.The defendant set up a company to avoid an order of specific performanceregarding a piece of land.
The land was transferred to the company and becausethis was only reason for the company, it was decided by Russel Judge that thecompany was a sham and the defendant should be held liable. With regards towhether an overarching rule has emerged, the law is still very unclear withmore than one approach as to when the veil can be pierced. It can be said thatthe guidelines set out in Prest12do provide a structure to the current law. Lord Sumption’s division intoconcealment and evasion have meant that there are two leading authorities tofollow. One outlines when the veil can be pierced and the other when it cannot.
This does not mean however that there is one single overarching rule. Theexceptions of agencies and façade still stand alongside evasion and concealmentmeaning that there are 4 different methods of viewing any individual case. Salomon13still provides the good authority as to when it can be pierced but eventhis is too broad to be described as an overarching rule. It was not set out inthe judgment the line between concealment and evasion, nor does it outline whenthe veil cannot be pierced. Prest14deals with the latter but with regards to the former it must still bedecided on a case by case basis. Prest15and Salomon16are similar in the fact that both defendant’s transfers items to companiesin order to avoid something; Salomon17avoided liability for insolvency and Prest18avoided liability for his assets. Why was it therefore decided that one of these was legal and the otherwas not? Both were avoiding losing monies so why was one legal and not theother.
With respect asto whether the law in now more developed or limited, it must be said that bothis the case. The law has developed in the sense that we now have new authorityto base cases upon and a more structured approach as to when and under whatcircumstances the veil can be pierced. In developing though, the law has alsobecome more limited. New cases meansmore structure and more structure means that the law is far less broad than itwas. Prior to Prest19we only had one authority that would only advise when the veil cannot bepierced. Prest20provided explanation as to when the veil can also be pierced thus limitingthe claim pool. In conclusion, I think the law has both developed and limitedthe idea of piercing the corporate veil but than an overarching rule has notyet emerged.
The company thegroup wish to set up will be a public limited company (PLC) rather than alimited company (Ltd). It is important to distinguish between the two beforedetermining the roles of parties and the company’s constitution. Both PLCs andLTD’s are governed by the Companies Act21.
This outlines everything to do with how a company should run and be formed andmore importantly what is legal and what is not. The main difference between apublic and a limited company is shares. Both types can raise capital thoughshares but only a public company can trade shares on the stock markets.
Thiscan have both positive and negative effects. The use of the stock market meansthat anyone and everyone can buy shares in your company. This makes it quickand easy to raise capital to be used by the company. However, it also meansthat the documentation and details of the company are shared publically.
Limited companies on the other hand, cannot use the stock market, insteaddirectors usually offer out shares to people they trust and know and raisecapital this way. This can be beneficial because you could share it amongstwealthy investors and gain substantial capital. It also keeps the company moreprivate as documentation doesn’t have to be shared but it means that shares arenot traded and aside from the initial capital, your friends who are now membersmay not wish to invest any more. It is important to note that a shareholder anda member are the same thing.
With regards to the clients, a PLC would mean thatthey could raise a lot of capital very quickly and not have to rely on the 1.1million they have. With regards toroles within the company, there are three main positions to discuss.
Firstly,the shareholders. Holding a share in the company provides you with rights inthe company as well as access to the profits made on that’s share; dividends. ‘The subscribers of a company’s memorandumof association are deemed to have agreed to become members of the company and onits registration become members and must be entered as such in its register ofmembers’22.As a shareholder, you are only liable for your first initial payment, no more.Bradley, Laura and Jason have all put forward money to invest in this project.With regards to them wanting to invest no more than what they have already putforward, they don’t have to. For example, Bradley is liable to pay in the onemillion pounds into the company but after that no more from him is required.The same is applicable to Laura and Jason.
As shareholders, they also have theability to elect a director of the company or a board of directors. However,because this is a limited company, all those who may have bought shares in thestock markets will also get a vote.The director themselves then also acquiresduties under the Companies Act. A director is any person occupying the positionof director no matter what their title23.
Asdirector, there are 7 duties they must adhere to. They must act within theirpowers only, promote success of the company, have an independent judgement,perform their role with reasonable care, skill and diligence, avoid conflictsof interest, not to accept benefits from any third parties and finally, todeclare an interest in proposed transactions. It is impossible to advise whomight be the director because it is up to the shareholders as mentionedpreviously.
With regards to the constitution, a companymust have articles of association24.Section 17 of the Act25describes a constitution as including the articles and any resolution oragreement affecting the constitution. It is usually recommended that membersenter a separate shareholders agreement that differs from the company’sconstitution. Previously, Table A has set out provisions/articles that companiescan use in their constitution. For modern companies however, the Company’s Act200626 saysthat a company can chose to use all or any of the provisions of the modelarticle or to create its own bespoke articles.
In this situation, I wouldadvise following the model article. Following these articles makes thembinding; Companies Act 2006, s33(1). An article they may wish to add in, eitherto the constitution or the shareholders agreement is with reference to majorityshareholders. Currently Bradly has the biggest share or owns the most.
Out of11, he would own 10. This would give him the right to appoint directors andmake decisions on the company’s behalf because he controls more than 75% of theshares. With this in mind, for Jason, Laura and Lizzie to be able to have anyinput, they must decide a way of limiting Bradleys powers but not reducing theeffect of shares. It would not be possible to suggest that one share has thesame power as 11 because then nobody would buy more than one share in thecompany and raising capital would fail. A minority shareholder is someone who ownsless than half the company’s total shares.
In this scenario, Laura and Jasonwould automatically become minority shareholders because they own less thanhalf. A claim against the company is available when the company has or is beingmanaged in such a way that is unfairly prejudice to the minority shareholders.If this is the case there are 3 types of claim. The first is an unfairprejudice petition27. Thisis available when the affairs of the company have been or are being managed ina way that is unfairly prejudicial to the shareholders or at least the petitionowner. If the courts find this is thecase, the result is usually that the majority shareholders are asked to buy outthe minority ones at a price set by the courts. This then frees the minorityshareholders from the company. The second claim is just and equitable windingup28.
As thename suggests, this involves the winding up of the company and bringing it toan end. In order to do this however, the petitioner must show that there willbe substantial surplus after the winding up. The courts will award this remedy ona similar basis to that of the unfair prejudice; unfair conduct. Unlike anunfair prejudice claim however, there are limited advantages as to when awinding up would be a preferred remedy. Finally, a claimant can pursue a derivativeclaim. This is a statuary remedy under the Companies Act29 and ismade on behalf and for the benefit of the company. The claim must be vested incompany involving either negligence, breach of duty or breach of trust by thedirectors.
Unlike the other 2 remedies, a court must allow a derivative claimto pass. This means that as soon as the claim is issued the courts must allowit to pass. Regarding the name of the company the grouphave chosen, Princess (By Royal Appointment) PLC would not be allowed withoutpermission. As the company being formed is a public limited company it musthave PLC at the end of its name; s58(19)30, andalthough this name has that, it’s the wording within that conflicts with theAct.
Sections 53 and 54 outline what words cannot be used in the name of acompany. Section 53 deals with all words that are offensive and although that doesn’tapply here, section 54 does. Section 54 of the Companies Act 2006 sets out thatyou must seek permission to include any word which may link the company to the HerMajesty’s Government or any public or local authority. Because the name suggeststhis by using ‘By Royal Appointment’, they would have to seek permission fromthe secretary of state to name the company this.
Before this is done theycannot use this name for the company.Looking at finance, the most common way fora new company to raise capital is through loans or overdrafts from a financialinstitution. By using Lizzies property, the group could apply for a mortgage onthat property that would raise them a large amount of capital by using the premisesas security. This would also be known as a debenture. A debenture is a term usedto refer to secured loans such as a mortgage. They are secured so that if thecompany defaults from the repayment, the lender can take steps so regain theirmoney. In this case a title to a property is not enough, instead the moneylender obtains a property right to gain the land which is used as security becausethey can enforce this at a later date.
In order to obtain this security, afixed or floating charge can be used. A fixed charge is applicable to one assetonly for example, Lizzies premises. A floating charge however, is a chargeshifting over assets; Re Cimex TissuesLtd (1994)31.
Assets can include cash, stock plant and vehicles, essentially all the companyowns. The difference between the two charges being that because it’s a fixedcharge over one asset, the company can sell that particular asset. A floatingcharge however allows the company to sell and purchase new assets as theyplease. I would advise that the clients use a floating charge so they canreplace assets as they wish and use the £500,000 premises as security for amortgage to gain extra capital.1 1897 AC 22.2 2013 UKSC 34.
3 Alastair Hudson, Undertsandingcompany law (2nd edn, Routledge 2018) p37. 4 1897 AC 22.51962 1 WLR 832.6 2013 UKSC 34.
7 2013 UKSC 34, p19, paragraph 34.81897 AC 22.91939 4 All ER 116.101897 AC 22.
11 1962 1 WLR 832.122013 UKSC 34.131897 AC 22.142013 UKSC 34.152013 UKSC 34.
161897 AC 22.171897 AC 22.18 2013 UKSC 34.19 2013 UKSC 34.
20 2013 UKSC 34.21 2006.22 Companies Act 2006, s112.
23 Companies Act 2006, s250.24 Companies Act 2006, s18(1).25 Companies Act 2006.
26 s19(3).27Companies Act 2006, s994.28 InsolvencyAct 1986 s125.29 2006,s260-264.
30 CompaniesAct 2006.31 1 BCLC 409.