Chapter 4 - The Company As A Distinct Legal Person

Question 1

What are the two categories of legal person?

Answer 1

Natural and artificial

Question 2

What types of corporation are there?

Answer 2

Corporations sole

Corporations aggregate

Question 3

What are the key legal consequences of a registered company being a corporation?

Answer 3

• can enjoy legal rights or property

- can be legally liable

Question 4

Identify those characteristics that distinguish an artificial person from a natural one.

Answer 4

There are some differences in rights, including certain human rights.

Question 5

What were the facts in Bilta Ltd v Nazir?

Answer 5

The directors had committed fraud that left the company insolvent, and tried to argue that the wrongdoing should be attributed to the company. Held: where a company has been the victim of wrong-doing by the directors, the wring-doing cannot be attributed to the company.

Question 6

What were the facts in Salomon v A Salomon and Co Ltd?

Answer 6

Salomon registered a company for his sole trader business. He sold his business to the company at an overvalue, including with a £10,000 debenture. The profitability of the business declined and was liquidated. Salomon used his floating charge to secure his £10,000 but this left no money for other creditors, who tried to claim personally against Salomon. Held: Salomon was not liable.

Question 7

What was the decision in the first instance court in Salomon and how were agency principles applied to the company?

Answer 7

Fraud was not established on the facts of the case, but that the company was an agent of Salomon and that he should indemnify the company of its debts.

Question 8

What was the court of appeal decision in Salomon and how were trust principles applied by the court?

Answer 8

The court of appeal rejected that the company was an agent, but rather stated that it was a trustee, and so Salomon should provide indemnity.

Question 9

What did the House of Lords decide about the liability of Mr Salomon for the debts of the company and the validity of the debentures?

Answer 9

Despite the business and managers being the same, the company is a a separate person and so the members (Salomon) are not liable.

Question 10

What is the liability of a member of an unlimited company to contribute to the assets of the company while the company is continuing to trade?

Answer 10

Only the amount unpaid on their shares.

Question 11

What is the liability of a member of an unlimited company to contribute to the assets of the company on a winding up?

Answer 11

s74 IA 1986: when a company is wound up, every past and present member is liable to contribute to its assets to any amount sufficient for payment of its debts and liabilities.

Question 12

What is the liability of a member of a company limited by shares to contribute to the assets of a company on a winding up?

Answer 12

No contribution is required from a member exceeding the amount unpaid on shares (s74 IA 1986)

Question 13

Name three key benefits believed to be delivered by limited liability.

Answer 13

• encouragement of investment by members of the public
• facilitation of the transfer of shares
• clarity and certainty as to the assets available to creditors of the company.

Question 14

Provide examples of statutory provisions that empower the court to pierce the corporate veil.

Answer 14

CA 2006 s 767 - if a plc operates without a trading certificate, the directors are jointly and severally liable for any transactions.

CDDA 1986 s 15 - a person managing a company while disqualified is jointly and severally liable for debts incurred by the company.

Fraudulent and wrongful trading (s 214 and 21 IA) - any director trading while knowing there was no possibility of avoiding insolvency can be made to contribute to a winding up.

Question 15

Identify arguments prior to Prest that could be used to pierce the corporate veil.

Answer 15

1 - the company is a fraud or sham
2 - the relationship between the parent and subsidiary was one of agency
3 - the parent and subsidiaries should be treated as a single economic unit
4 - the veil should be pierced in the interest of justice.

Question 16

Is a subsidiary company presumed to be an agent of its parent?

Answer 16

No, Salomon established that just the fact of incorporation is not sufficient to establish an agency relationship. However, an agency relationship can arise.

Question 17

Explain the difference between the concealment and evasion principle.

Answer 17

The evasion principle is the only example where the courts will pierce the veil.

Question 18

Set out the three conditions that will need to be satisfied in order for the evasion principle to apply.

Answer 18

1 There must be an existing obligation placed upon X.
2 X must interpose a company in order to evade or frustrate liability.
3 The company interposed must be under X’s control.

Question 19

What were the facts in SSK v Birmingham Corporation?

Answer 19

SSK set up a subsidiary to run part of its business, to which ownership was never transferred. Birmingham Corporation compulsorily purchased the land on which the subsidiary operated, and tried to pay compensation to the subsidiary. Held: the subsidiary was an agent of SSK and as such SSK should receive the compensation.

Question 20

Which case clarified when the corporate veil may be pierced?

Answer 20

Petrodel Resources Ltd v Prest.

Question 21

What were the facts in Petrodel Resources Ltd v Prest?

Answer 21

Mr and Mrs Prest were divorcing and the high court awarded a settlement of £17.5 million to Mrs Prest. Prest argued that assets could not be transferred, because they were held by his companies, not by him. Held: the companies held the property on trust on behalf of Prest, and so they could be used in the settlement. Notably, the courts did not piece the corporate veil

Question 22

Following Prest, what is the only scenario where the corporate veil may be lifted?

Answer 22

Where “a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.”

Question 23

Following Prest, what is the only scenario where the corporate veil may be lifted?

Answer 23

Where “a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.”

Question 24

What was the ruling in Chandler v Cape?

Answer 24

Chandler contracted asbestosis working for Cape’s subsidiary which was since dissolved, and sough compensation for the parent. Held: the law can impose liability on a parent where:

• their business is the same
• the parent has/ should have superior knowledge on the industry
• the subsidiary’s system of work is unsafe as known by the parent
• the parent knew / should have known that the subsidiary would rely on its superior knowledge,