Company Directors
Disqualification Act 1986, s 15
Companies Act 2006, s 767(3)
Figure 3.7 Statutory provisions supplementing the rights of a creditor against the company
Fraudulent or wrongful trading, Insolvency Act 1986, ss 213 and 214
When a company has ceased trading and is being wound-up, statutory provisions enable the liquidator to apply to the court for orders against any persons who were knowingly a party to fraudulent trading by the company (s 213) or any director who allowed the company to continue to trade when he knew or should have known there was no reasonable prospect of avoiding insolvent liquidation (s 214). The orders require those persons to contribute to the assets of the company.
These statutory provisions do not give rights directly to creditors of a company but they are important examples of how the strict consequence of the separate legal personality of the company, that creditors have access only to the assets of the company, is ameliorated by entitling the liquidator to bring actions that will benefit creditors against directors and (in some cases) shareholders. These and similar statutory provisions are examined towards the end of this book, see Chapter 16.
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KEY FACTS
Limits on the implications of incorporation/separate legal personality
Persons dealing with a company can take self-help action to mitigate the consequences of each company having a separate legal personality.
Personal guarantees and parent company guarantees are very common.
Statutes sometimes provide a person dealing with a company with an alternative remedy to the remedy they have against the company.
A disqualified director who takes part in management will be liable for the debts and other liabilities of the company.
Company Directors Disqualification Act 1986, s 15
It is a matter of statutory interpretation whether or not a statute permits or requires the separate legal personality of a company to be ignored.
Dimbleby v National Union of Journalists (1984)
The liquidator of a company has a range of statutory powers to bring actions against directors and others to swell the assets available for distribution to creditors.
Insolvency Act 1986, ss 212–214
The court will pierce the corporate veil and disregard the separate legal personality of a company in some, very limited, circumstances.
If the company is a sham its separate legal personality will be ignored.
Jones v Lipman (1962) Gilford v Horne (1933)
Trustor v Smallbone (No 2) (2001) Occasionally, a rule of law will be extended in such a
way as to make the separate personality of a company unimportant.
Conway v Ratiu (2006) involved a solicitor being found to owe professional duties to the sole shareholder of client companies.
Supplier Ltd
Claimant
Sister Ltd
Parent Ltd
Figure 3.8 Who can the claimant sue?
ACTIVITY
Applying the law
Consider Figure 3.8 and the following facts:
Claimant contracted with Supplier Ltd for the supply of widgets. Supplier Ltd failed to supply the widgets and Claimant suffered loss of profits on the resale of the widgets. Claimant has discovered that Supplier Ltd is a subsidiary company of Parent Ltd which is also the parent company of Sister Ltd. Each of Parent Ltd and Sister Ltd have substantial assets but Supplier Ltd has no assets.
Against whom does Claimant have a cause of action? Would your answer be different if the assets of Supplier Ltd had been transferred from Supplier Ltd to Parent Ltd or Sister Ltd after Supplier Ltd had breached the contract of supply with Claimant? What enquiries would you make about the circumstances of the asset transfer in order to advise Parent Ltd and Sister Ltd as to their potential liabilities?
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LIMITS ON THE IMPLICATIONS OF INCORPORATION/SEPARATE LEGAL PERSONALITY
SAMPLE ESSAY QUESTION
Critically analyse the concepts of limited liability and separate corporate personality explaining how they complement one another.
Unpack the question
This is the first essential step which you must take time to do properly. You should separate out:
s
s s
relate to/complement one another s
s concepts/relationship.
Explain the meaning of limited liability s s
members to contribute to the assets of the com-pany to enable it to pay its debts that is limited s
members of a company are liable to contribute to the company to any amount sufficient for payment of its debts and liabilities, i.e., liability is not limited:
Insolvency Act 1986 s 74
s is restricted to the amount, if any, unpaid on his shares: s 74(2)(d).
Explain the meaning and consequences of separate corporate personality
s
s or more of the owners of the company, therefore the owner is not liable to pay any sum owed by the company to the lender/creditor
s quences: a company can own property, can be a party to a contract, can act tortiously, can be a victim of tortious behaviour, has human rights, can commit a crime, can be the victim of a crime, can sue and be sued, has perpetual existence until dissolved
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CHAPTER 3 THE COMPANY AS A DISTINCT AND LEGAL PERSON
s as in the case of individuals, unless limited under a contract/by effective notice, but its ability to meet its liabilities when it is trading is limited to the value of its own assets/resources.
CONCLUDE
Explore the relationship between the two concepts
s porate personality able to incur debts and liabilities, without limiting the liability of its members (an unlimited company)
s extremely difficult to implement limited liability without a separate corporate personality, and legal regulation of exclusion and limitation of liability (clauses/notices etc) would almost certainly pre-clude an effective outcome.
Reflect on the concepts
s cepts to consider the implications and attractive-ness of the concepts
s who see limited liability as encouraging undercapi-talised and irresponsible business initiatives and those who so it as essential to facilitate investment in business
s who did not choose to do business with the company.
SUMMARY
Registered companies are artificial persons called corporations n On registration a company becomes a separate legal person, s 15(1).
n A company registered under the Companies Act 2006 has the legal capacity of a natural person, s 39.
The consequences of incorporation/separate legal personality
n Without more, the shareholders of a company cannot be sued to enforce contracts to which the company is a party (Salomon v A Salomon & Co Ltd (1897); Ord v Belhaven (1998)).
n Property owned by the company is not owned by its shareholders and shareholders have no insurable interest in it (Macaura v Northern Assurance Co (1925)).
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LIMITS ON THE IMPLICATIONS OF INCORPORATION/SEPARATE LEGAL PERSONALITY
n Companies may own shares in other companies and corporate groups are very common.
n Corporate groups may be organised so as to minimise the legal liabilities of individual companies in the group (Adams v Cape (1990)).
Limited liability: a concept distinct from separate legal personality
n A shareholder of an unlimited company must contribute sums to the company in a winding up to enable the company to pay its creditors in full (Insolvency Act 1986, s 74(1)).
n A shareholder of a limited company is not required to contribute more than the amount unpaid for the shares he owns (Insolvency Act 1986, s 74(2)(d)).
n A company can make calls on nil-paid or partly paid shares until all shares are fully paid-up (Preston v Grand Collier Dock Co (1840)).
Limits on the implication of incorporation/separate legal personality
n Persons dealing with a company can take self-help action to mitigate the consequences of each company having a separate legal personality.
n Personal guarantees and parent company guarantees are very common.
n Statutes sometimes provide a person dealing with a company with an alternative remedy to the remedy they have against the company.
n A disqualified director who takes part in management will be liable for the debts and other liabilities of the company (Company Directors Disqualification Act 1986, s 15).
n It is a matter of statutory interpretation whether or not a statute permits or requires the separate legal personality of a company to be ignored (Dimbleby v National Union of Journalists (1984)).
n The liquidator of a company has a range of statutory powers to bring actions against directors and others to swell the assets available for distribution to creditors (Insolvency Act 1986, ss 212–214).
n The court will pierce the corporate veil and disregard the separate legal personality of a company in some, very limited, circumstances.
n If the company is a sham its separate legal personality will be ignored (Jones v Lipman (1962); Gilford v Horne (1933); Trustor v Smallbone (No 2) (2001)).
Further reading
Useful websites
The Human Rights of Companies website:
http://www.thehumanrightsofcompanies.com
Understanding the Corporate Manslaughter and Corporate Homicide Act 2007 (Ministry of Justice, 2007), accessible at: www.justice.gov.uk/docs/manslaughterhomicideact07.pdf
Articles
Cheng, T K, ‘The Corporate Veil Doctrine Revisited: A Comparative Study of the English and the U.S. Corporate Veil Doctrines’ (2011) 34 BC Int’l & Comp. L. Rev. 329.
Conaglen, M, ‘Sham Trusts’ (2008) 67 CLJ 176.
Ferran, E, ‘Corporate Attribution and the Directing Will’ (2011) 127 LQR 239.
Hargovan, A, and Harris, J, ‘Piercing the Corporate Veil in Canada: A Comparative Analysis’
(2007) 28 Comp Law 58.
Kahn-Freund, O, ‘Some Reflections on Company Law Reform’ (1944) 7 MLR 54.
Linklater, L, ‘Piercing The Corporate Veil – The Never Ending Story’ (2006) 27 Comp Law 65.
Moore, M, ‘A Temple Built on Faulty Foundations: Piercing the Corporate Veil and the Legacy of Salomon v Salomon’ [2006] JBL 180.
Rixon, J, ‘Lifting the Veil between Holding and Subsidiary Companies’ [1986] 102 LQR 415 (on Woolfson).
Sullivan, G R, ‘The Attribution of Culpability to Limited Companies’ [1996] CLJ 515.
Books
Pinto, A and Evans, M, Corporate Criminal Liability (2nd edn, Sweet & Maxwell, 2008).
Wells, C, Corporations and Criminal Responsibility (2nd edn, Oxford University Press, 2002).