Anglo-American Business Law Chapter 4 The company form 夏秀渊 1 1

Chapter 4 The company form Learning Objectives: To learn some knowledge about legal personality and to learn some knowledge about the different regulations to different types of companies.

Topic list 1. Distinction between sole traders, partnerships and companies 2. Limited liability of members 3. Types of company 4. Effect of legal personality 5. Ignoring separate personality----lifting the veil of the company Piercing the corporate veil

Sole trdder

Salomon v. Salomon & Co Ltd. Facts: Mr. Salomon was a prosperous leather merchant, who decided to convert his business into limited company. He incorporated Salomon & Co Limited, with himself, his wife and his five children as directors. The company purchased the business and S&C Ltd had to pay for the business:

20001—Mr. S £20,007 share capital 6—other shareholders £10,000 debentures secured -- Mr. S £38,782 £8,782 cash unsecured -- other creditors

The company ran into financial difficulties, and the debenture holders appointed a receiver. The receiver sold off all of the company's assets, which were sufficient to pay off the debenture holders, but nothing was left for the unsecured creditors. Imagine whether S would be awarded the assets owed by S&C Ltd ? Why? S was separate from S&C Ltd (veil) he was a secured creditor (through the debenture)

It was the decision of the House of Lords relating to limited liability for the members of companies under English law. It established that a company is a separate legal entity a separate legal entity gives rise to many of its characteristics the most important of them is limited liability for the members of the company

What is company? (1) Definition of company It is a legal entity registered under the Company Act 1985. key feature: it has a legal personality separate from its owners and directors. It is a formal arrangement, surrounded by formality and publicity. Chief advantage: member’s liability for the company’s debts is typically limited.

(2) Definition of legal personality It is a common law principle that grants a company a legal entity, separate from the members who comprise it. It is the veil.

(3) Consequences of separate personality (a) Limited liability: limited to the nominal value of the shares who helds. (b) Perpetual succession: any change in its membership can't change the company’s existence and the company ceases to exist only when it is formally wound up. (c) The company owns the business property in its own right: shareholders own shares, they do not own the assets of the business they have invested in (Macaura v Northern Assurance (1925)).

(d) The company has contractual capacity its own right and can sue and be sued in its own name: members are not able to bind the company. The rule in Foss v Harbottle Where a company suffers an injury, it is for the company, acting through the majority of the members, to take the appropriate remedial action; an individual cannot raise an action in response to a wrong suffered by the company. (e) Lifting the veil of incorporation There are a number of occasions, when the doctrine of separate personality will not be followed.

Macaura v Northern Assurance Co Ltd (1925) Fact: M formed a company to buy his previous timber business. However, he forgot to transfer the insurance from his name to his company. The business burnt down. Were the insurers required to pay this fee? Held: no, since it is unlawful to insure against another person’s loss.

Appendix: The principle of separate legal personality was confirmed by more recent cases, one of which follows. Lee v Lee’s Air farming Ltd 1960 Fact: The C, Mr. Lee, who owned the majority of the shares of an aerial crop-spraying business, and was the sole working director of the company, was killed while piloting the aircraft. Decision: Although he was the majority shareholder and sole working director of the company, he and the company were separate legal persons. Therefore he could also be an employee with rights against it when killed in an accident in the course of his employment.

2. Limited liability of members Ford Co. CEO Bill Ford 2004 AGM (1) Definition: It is a protection offered to members of certain types of company. In the event of business failure, the members will only be asked to contribute identical amounts to assets of the business.

Amount paid Assets 100000 Liability 600000 A 30% (30000) Full B 50%(50000) 40000 C 20%(20000) Q：Who can the creditors sue for paying the liability? What should the shareholders do?

Why Xier became “white-hair girl”?

(2) Function: (a) Protection for members against creditors: the creditors cannot demand payment of the company’s debts and debts from members of the company. (b) Protection from business failure: The company is liable without limit for all its own debts. (When the company is unable to pay its own debts, the company may wind up, which will enable the creditors to be paid from the proceeds of any assets remaining in the company. ) (3) Although the creditors of the company cannot ask the members of the company to pay the debts of the company, there are some amounts that members are required to pay, in the event of a winding up. Members may have to pay money still owned from purchasing their shares, or under a guarantee.

(b) Can only be a private company; 3. Types of company Type Characters LC by shares limited to the amount unpaid on their shares Private (Ltd) Public (Plc) By guarantee limited to the amount that they undertake to contribute when wind up typically charities ULC (a) Corporate body; (b) Can only be a private company; (c) Members' liability is unlimited; (d) Benefit to member is privacy as accounts must be prepared and audited but need not be filed.

(1) Fast forward: (a) Limited liability only to the members, not the company. (b) Guarantee companies have the advantage of not having to include the word "limited” in the name, although it still must appear on some business documentation.

Guarantee Liability If a business fails, a small Guarantee can protect the owners of a company from personal loss, or even bankruptcy. Unless you have given any separate guarantee for a particular transaction - or acted illegally - the debts are the company's, not yours.

Appendix: Change of status (a) A company may change from limited to unlimited or vice versa, but once re‑registered may not change back again. (b) s.49 CA 1985: A limited company may re‑register as unlimited. (100% majority required) (c) s.51 CA 1985: An unlimited company may re‑register as limited. (special resolution)

(2) Public and Private Companies (a) Private Companies: Tend to be small. They cannot issue shares to the 'public'. (b) Public Companies: To certificate a public company, the conditions are: Name: end with plc (ccc) Memorandum of association said to be so Authorized capital: minimum £50,000 Limited company

(c) Listed Companies Shares are 'quoted' on the Stock Exchange and thus can be traded on the open market. Their shares must have a market value of at least £700,000 (usually more) before a 'listing' can be obtained. 中石油A股上市 公司市全球第一 上市公司需及时披露金融投资和重大合同

About minimum £50,000 Original as plc: will not be permitted to trade until its allotted share capital ≥£50,000 Re-register as a plc: will not be permitted to trade until its allotted share capital ≥£50,000 (25% paid up and the whole of any premium)

(d) Differences between private and public companies Private companies directors ≥2, ≤70(age), ≥1 Rules on loan More stringent (including their subsidiaries) Capital have minimum-issued and paid-up capital(≥￡50,000) can offer its shares/ debentures to public No Minimum amount. cannot offer its shares/ debentures to public Name Must end its name with word plc Must end its name with word limited/ Ltd Commencement of business After obtain a certificate from the registrar As soon as it is incorporated

public companies Private companies Change of status 75% majority to re-register as private 100% written consent to re-register as unlimited 75% majority to re-register as public distribution of dividend payments the controls over them are relaxed the requirement to keep accounting records shorter Whether can provide financial assistance for the purchase of their own shares Yes may purchase their own shares out of capital

(5)Group’s of companies Parent company Owens all the shares of Subsidiary company Multi-national companies A company which produces and markets its product in more than one country. Commonly known examples include Coca Cola or Nike. However, the majority of companies only operate in one country.

4. Practice：Veil of incorporation (a) Once incorporated, a company exists as a separate legal person from its owners or members and a veil of incorporation is said to be drawn between them. By contrast, an unincorporated association, such as a partnership, does not have a legal identity separate from that of its members. The distinction between them was clearly illustrated in the case of Salomon. The veil of incorporation gives rise to a number of important legal consequences. (Limited liability, legal entity, Transferability, contractual capacity)

In certain circumstance, the veil will be lifted

Individuals and company Apply to Effect Individuals and company (members, directors, managers…) Individuals personally liable for a company’s debts restrictions on individuals may be extended to the company companies in the same group (holding company, subsidiaries) companies in the same group will be treated as a single commercial entity Members of company limited by guarantee: give a separate guarantee to a specific transaction and has wrongful acts

(b) In certain circumstance, the veil will be lifted with the result either that: the company will be identified with its members or directors, or that a number of companies in the same group will be treated as a single commercial entity.

(c) Lifting of the veil by the courts The court may ignore the distinction between a company and its members and managers if the latter use that distinction to evade their existing legal obligations. As a result, members may be made personally liable for a company’s debts or restrictions on individuals may be extended to the company. (Gilford Motor Co. v. Horne)

(i) Breach of public interest (Re F G Ltd 1953) (Re FG (Films) Ltd (1953), where the major shareholder of the company was the president of a US company and the company was formed for sole purpose of enabling a film qualify as a British film) (ii) to evade liabilities (Re H and Others, 1996) (ⅲ) to evade taxation (Unit Construction Co Ltd v. Bullock (Inspector of Taxes)) (ⅳ) Quasi-partnership: to reveal the company as a quasi-partnership. Where the company only has a few members, all of them are involved in its affairs, the individuals who have operated contentedly as a company for years fall out and one or more of them seeks to remove the others.

In each of these cases the veil was lifted to identify a company with its members or directors. It can also be raised so as to eliminate the distinction between companies, that is, to treat groups as a single legal entity. In Adams v Cape Industries 1990, the court of Appeal suggested that the veil might be lifted only where: the subsidiary is acting as agent for the holding company; the group is to be treated as a single economic entity; the corporate structure is being used as a sham to conceal the truth.

(d) Lifting of the veil by statute (i) Fraudulent Trading: Directors and other officers may be become liable personally liable for a companies debts, if they engage in fraudulent or wrongful trading or participate in the management of a company in contravention of an order under the CDDA 1896. (This is also a criminal offence.) (ii) Failure to obtain a trading certificate (plcs only).

(ⅲ) Sole member: Public companies must have at least 2 members (ⅲ) Sole member: Public companies must have at least 2 members. Breach of this rule makes the remaining member jointly and severally liable with the company if they are aware of the fact and the situation exists for more than 6 months. (Liability is only in relation to debts incurred after the initial 6 month period.) Other examples of lifting the veil: personal guarantees by members/ directors; preparation of group accounts; under tax law.

Gilford Motor Co. v. Horne Fact: Mr. Horne was an ex-employee of The Gilford motor company and his employment contract provided that he could not solicit the customers of the company. In order to defeat this, he incorporated a limited company in his wife's name and solicited the customers of the company. The company brought an action against him. Held: it was clear that the main purpose of incorporating the new company was to perpetrate fraud. Thus the court of appeal regarded it as a mere sham to cloak his wrongdoings. Commend: The veil was lifted to prevent the circumvention of a restraint of trade clause.

To evade Tax Unit Construction Co Ltd v. Bullock (Inspector of Taxes) Fact: Three companies, wholly owned by a UK company, were registered in Kenya. Although the company’s constitutions required board meetings to be held in Kenya, all 3 were in fact managed entirely by the holding company. Held: The 3 companies were resident in UK and liable to UK tax. The Kenya connection was a sham, the question being not where they ought to have been managed, but where were managed.

Summary of situations in which To enforce obligations the veil can be lifted To enforce law To enforce obligations To expose groups Liability of a sole member for debts Legal obligations Single economic ability Wrong use of company name Quasi-partnership Corporate structure a sham Disqualified directors Public interest Fraudulent and wrongful trading

Practice：Partnership V Company There are a number of advantages (a) Legal entity: most important factor; a company is a distinct legal entity separate from its members whereas in a partnership there is no separate legal person as distinct from the partners. This means the assets and liabilities of the business belong to the company itself. (b) Limited liability: If the company becomes insolvent, the shareholders are not liable for the company’s debts, unless they remain unpaid shares. A partner is normally jointly and severally liable for all the debts of the firm to the extent of his or her personal wealth.

(c) Perpetual succession: In the case of companies, there is no cessation brought about by a change in the membership, but any change of partners in a partnership operates as a termination of the old partnership and the beginning of a new one. (d) Transferability: Subject to any restrictions imposed by the company’s constitution, a company member’s shares constitute a form of property and are freely transferable. Although a partner can assign his interest, the assignee of it will not as a result become a partner in a partnership.

(e) Capital and security: A company may find it easier to raise capital for the expansion of the business than a partnership since the liability of potential investors is limited and a company can borrow by debentures and loan stock. Furthermore, a company can raise capital by providing a fixed or floating charge as security but a partnership cannot provide security by way of a floating charge. There are , for the benefit of shareholders, various rules and regulations, contained in the Companies Act and the company ' s constitution, which are stringently applied relating to the reduction or distribution of a company’s capital whereas in the case of a partnership partners may，by mutual agreement, withdraw capital from the partnership as they wish .