SEPARATE LEGAL PERSONALITY (5) Group structure ***
• - Limited liability intended for natural persons, not companies, otherwise double limited liability ∴ parents ≠
o INTERESTS OF JUSTICE *Restructuring
CREASEY +
likely to be liable for subsidiary’s debts - Restructuring transferred X’s assets to Y ∴ X couldn’t satisfy C’s unfair dismissal claim
TYPES OF COMPANIES
o - Subsidiary’s separateness disadvantages parents who suffered loss - Court: PTV in interests of justice
• Private limited company (Ltd): Ownership via shareholding Barings VS.
o S154: Requires 1 director - Parent suffered loss b/c subsidiary’s loss ≠ actionable by parent ORD -
• Public company (Plc) - Overruled Creasy: No PTV, legitimate restructuring b/c financial crisis > sham to avoid liability
o S154: Requires 2 directors o - Radically extended Salomon principle, b/c allows asset partitioning (parent puts assets in subsidiaries
o Issues shares to general public beyond creditors’ reach) ****
• MODERN VIEW: PTV for SHAM/AGENCY > single economic unit/interests of justice
• Company limited by shares: Shareholders only liable for amount unpaid on their shares ADAMS v Cape ****
(6) Phoenix companies
• Company limited by guarantee: Non-profit making entities, e.g. charities, clubs - Personal injury claims against US subsidiary, but no assets ∴ sought damages from UK parent
• - Creating phoenix companies abuses limited liability
o Constitution binds members to a guarantee to contribute £X to pay off debts in insolvency - Court: Salomon applies = subsidiary has separate rights + liabilities
o GRIFFITHS: Directors of failed company walk away from debt + start another company under similar
o No issue of shares, b/c ≠ distribute profits to members - Parent allowed to structure group to TAX AVOID (Google HQ in Ireland), but NOT TAX EVADE
name ≠ acceptable, b/c potential for fraud by incompetent/dishonest directors
o Raises funds via loans/subscription/levy fees for services - E.g. transfer major assets to 1 subsidiary + risky activity by another
• Unlimited company: Members ≠ protected by limited liability PIERCING THE VEIL - 3 circumstances of PTV:
• Lord SUMPTION: “Piercing the veil” = COMPANY + CONTROLLER ≠ TREATED AS SEPARATE PERSONS 1) Document states 2 companies operate as 1
SEPARATE LEGAL PERSONALITY *Salomon = accepted position in law, but do narrow exceptions apply?
• Narrow exception: Fraud, b/c intention to deceive Beckett
• Companies have separate legal personality ∴ S protected himself against liabilities of the business - Interpreted employment contract as group of companies forming a single entity
Brougham
o E.g. Owns property, party to contracts, commits crimes, sues etc. 2) Sham subsidiary, e.g. Lipman
- 2 undischarged bankrupts incorporated a company to defraud debenture holders
Salomon +
- Court: If company used to perpetrate fraud, may pierce the veil 3) Express/implied (conduct) agency of parent: Parent’s day-to-day control over subsidiary
- Boots + shoes sole trader, who incorporated a limited company
- Implied = high bar ∴ ↓ ability to PTV
- Sold sole trader business to company w/ £10k debenture to S (prioritized over unsecured creditors) EVASION
- S owned most shares + 6 family members held 1 share each • If company = ‘mere cloak/sham’ = PTV • Effective exception?
- Company went insolvent Gilford o + Courts willing to PTV to award compensation
- Liquidator argued incorporation = sham ∴ S personally liable - NON-COMPETE CLAUSE. When dismissed, incorporated a rival company o - Inconsistent approach
- CoA: Sham to operate as a single person company w/ “6 dummies” to satisfy formalities ∴ invalid - Court: Sham to use company to evade existing legal obligation ∴ issued INJUNCTION o - When claim is against corporate group, Adams lets parents hide behind separate legal personality
- Moralistic approach: Nominee members’ bad faith + overvalued sale
Lipman
- HoL: No, company = separate legal personality ∴ S not liable for its debts OTHER EXCEPTIONS TO SALOMON if PTV ≠ available
- L AGREED TO SELL LAND to X. To avoid sale, incorporated a company + transferred land to it
- Literal approach: Company validly created b/c Act required 7 shareholders TORT ACTIONS
- Claimed land belonged to company
∴ satisfied S’s debt before unsecured creditors Parent company liable in negligence
- Court: Sham to avoid honouring agreement ∴ ordered SPECIFIC PERFORMANCE against company
• Exception = parent’s assumption of responsibility
Gramophone - Trustor AB CHANDLER v Cape
- Wholly owned subsidiary retained profit > distributed via dividends - Director TRANSFERRED FUNDS from Trustor AB to another company (X) owned by him - Subsidiary employee = lung cancer b/c asbestos exposure from subsidiary’s negligent operations
- Court: Business of company > of shareholders ∴ focus on actions of directors > who has ultimate - Some ££ reached him personally - Court: Parent liable, b/c assumed DOC to advise subsidiary on H&S steps + ensure steps were taken
control of company - Court: X = sham company to misappropriate funds ∴ D personally liable to RETURN FUNDS - ARDEN LJ: Parent assumes responsibility to subsidiary employees for high-level advice/strategy
Macaura - LIMITED LIABILITY - 4 requirements to hold parent liable in negligence:
- M sold timber on his land to a company + insured timber in his name 1) Parent + subsidiary’s business = same
• PTV exceptions = rare, e.g. evasion cases
- Destroyed by fire, so M claimed insurance 2) Parent has/ought to have superior knowledge on H&S in that industry
Prest
3) Subsidiary’s system of work ≠ safe
- HoL: Property belongs to company, not shareholders ∴ only company could insure it - Husband controlled companies w/ LEGAL TITLE TO PROPERTIES
§ B/c separate legal personality = denied remedy to M who lost his personal fortune 4) Parent knew/ought to have foreseen subsidiary would rely on parent’s superior knowledge
- Wife wanted properties in DIVORCE PROCEEDINGS
for employee’s protection
- UKSC: Separate legal personality = BELONGED TO THE COMPANY, not H ≠ PTV
Lee + - Lord SUMPTION: Old piercing cases split into concealment + evasion cases
- L took insurance policy entitling widow to damages upon death if he was a company ‘worker’ § Q) Bypassing > piercing veil to hold parents liable?
1) CONCEALMENT ≠ piercing the veil § Yes: Proves (4) if parent regularly intervenes in subsidiary’s trading operations, e.g. production
- Died, but insurers claimed L being sole director + owning all, but 1 share ≠ employee
- If company conceals real actor, looking behind a company to find real actor ≠ PTV § No: Limited to H&S claims
- Court: Entitled to damages
- TAN: E.g. undercapitalization/assets + controller intermixed = masks true actor (controller)
- Company = separate legal personality ∴ can validly enter contract to employ L 2) EVASION = true ground for piercing the veil • But rare: Thompson limits scope of Chandler
- Lord MORRIS: Company = perpetual existence, but members change over time THOMPSON
- Husband transferred companies whilst harmonious w/ wife ∴ no intention to evade ≠ PTV
- E.g. M may retire from directorship, but employment contract ≠ affected - Lord MANCE: Cautious to state evasion = only exception, b/c may be ↑ PTV categories - Despite parent appointing director to subsidiary board, owes fiduciary duty to subsidiary > parent
- Lord NEUBERGER: No real PTV cases - Court: Coordinated activity + shared resources = normal business conduct for group subsidiaries
LIMITED LIABILITY
• May establish separate legal personality w/ unlimited liability to incur debts CONTRACT Directors’ personal liability
• But hard for limited liability w/o separate legal personality, b/c laws on limiting liability in clauses/notices • If PTV brings non-party into contractual relationships on un-agreed terms ≠ PTV • Courts ↑ willing to find directors personally liable for torts, esp. intentional torts (e.g. deceit) > negligence
precludes it VTB MCA RECORDS
- VTB bank gave loan to company X to buy dairy companies - Depends whether directors’ involvement goes beyond mere voting for/against action = vague test
(1) Risk
- But transaction arranged by M who owned both companies § Artificial for small companies w/ small meetings
• + ↓ Risk = ↑ investment
- Defaulted ∴ VTB argued PTV, so M = personally liable
o + HANSMANN: Personal assets safe from creditors’ reach Deceit
- Court: No PTV, otherwise turns non-party (M) into a liable co-contracting party
o - FREEMAN disagrees: Bank loans require shareholders to provide guarantees ∴ any debts owed to - Instead, use fraudulent misrepresentation, b/c PTV = last resort if no other action available PAKISTAN SHIPPING
banks = reclaimed from personal assets - Missed shipping date, but M gave documents for payment ∴ company X’s bank paid what was owed
• + Management takes ↑ risk knowing members won’t lose personally CORPORATE GROUPS *Despite subsidiary’s separate legal personality, insolvent ∴ PTV makes parent liable - Company X refused to pay bank
o - Irresponsible risk-taking • + Parent’s control over group ≠ same as passive shareholders *** - Court: If makes fraudulent misstatement = personally liable, b/c intention to deceive
o DUNN: Parents aware/control risks undertaken by subsidiary ∴ in a position to avoid unnecessary risks
(2) Transferring shares Negligence
• Inconsistent approach
• + Facilitates transfer of shares o Restrictive: WILLIAMS
o Unlike unlimited liability = ↑ likely to sue wealthy shareholders, personal liability ≠ vary by wealth ALIBAZERO - - Despite negligent misstatements on company letter-headed paper, director ≠ personally liable, b/c no
of other shareholders ∴ homogenous shares easily transferred - After transferred ownership of oil between 2 subsidiaries, ship sank ∴ 1 st company claimed loss personal dealings w/ plaintiff ∴ no reasonable reliance to establish AoR
(3) Creditors - Court: Each company = separate legal personality ∴ 2 nd company = true owner
- But limitation period ended ∴ neither could claim STATUTORY CREDITOR PROTECTION = statute creates exception to Salomon
• - Shifts monitoring to creditors ∴ shareholders become passive owners • S213 IA 1986: Fraudulent trading
VS.
o + HANSMANN: ↑ Suitable, b/c widely dispersed shareholder ownership o Knowing party carries on business w/ intent to defraud
o ↑ Liberal to PTV. But unique facts = statutory compulsory purchase orders ∴ PTV b/c parents benefitted
• + Certainty as to assets available to creditors § KEAY: “Intent to defraud” ≠ clear
as the real controllers
• + ↑Risk to creditors = can adjust terms to ↑ interest § E.g. One-off fraud = hard to prove business carried on for fraudulent purposes ≠ liable
o AGENCY
• - Small creditors lack bargaining power o Hard to prove “actual dishonesty”
Smith, Stone & Knight +
• Reform: Minimum capital requirement Patrick
- Subsidiary owned land = subject to CPO
o But ≠ comfort creditors, b/c company may have £50k now, but not next week - Director delayed liquidation for 6 months to issue debentures to himself∴ prioritised over
- Agency relationship, b/c parent fully controlled subsidiary ∴ parent entitled to compensation
unsecured creditors
(4) Tort victims o SINGLE ECONOMIC ENTITY: Degree of control over subsidiary, e.g. same board; parent owns all shares - Court: Actual dishonesty requires “real moral blame”
• - “Involuntary creditors”, b/c injured by companies they didn’t choose to do business w/ DHN +
o Unlike creditors, can’t research company to assess creditworthiness/take security over company - Parent owned 2 subsidiaries (subject to CPO)
property/ negotiate terms of skill + care - Court: PTV, b/c single economic entity
VS.
• Reform: Compulsorily ↑ liability, esp. tort victims
WOOLFSON -
o But unfair, creditors had opportunity to research company + negotiate terms
- Court: Parent had no control over landowners ≠ single economic entity ∴ not entitled to
compensation for CPO
• - Limited liability intended for natural persons, not companies, otherwise double limited liability ∴ parents ≠
o INTERESTS OF JUSTICE *Restructuring
CREASEY +
likely to be liable for subsidiary’s debts - Restructuring transferred X’s assets to Y ∴ X couldn’t satisfy C’s unfair dismissal claim
TYPES OF COMPANIES
o - Subsidiary’s separateness disadvantages parents who suffered loss - Court: PTV in interests of justice
• Private limited company (Ltd): Ownership via shareholding Barings VS.
o S154: Requires 1 director - Parent suffered loss b/c subsidiary’s loss ≠ actionable by parent ORD -
• Public company (Plc) - Overruled Creasy: No PTV, legitimate restructuring b/c financial crisis > sham to avoid liability
o S154: Requires 2 directors o - Radically extended Salomon principle, b/c allows asset partitioning (parent puts assets in subsidiaries
o Issues shares to general public beyond creditors’ reach) ****
• MODERN VIEW: PTV for SHAM/AGENCY > single economic unit/interests of justice
• Company limited by shares: Shareholders only liable for amount unpaid on their shares ADAMS v Cape ****
(6) Phoenix companies
• Company limited by guarantee: Non-profit making entities, e.g. charities, clubs - Personal injury claims against US subsidiary, but no assets ∴ sought damages from UK parent
• - Creating phoenix companies abuses limited liability
o Constitution binds members to a guarantee to contribute £X to pay off debts in insolvency - Court: Salomon applies = subsidiary has separate rights + liabilities
o GRIFFITHS: Directors of failed company walk away from debt + start another company under similar
o No issue of shares, b/c ≠ distribute profits to members - Parent allowed to structure group to TAX AVOID (Google HQ in Ireland), but NOT TAX EVADE
name ≠ acceptable, b/c potential for fraud by incompetent/dishonest directors
o Raises funds via loans/subscription/levy fees for services - E.g. transfer major assets to 1 subsidiary + risky activity by another
• Unlimited company: Members ≠ protected by limited liability PIERCING THE VEIL - 3 circumstances of PTV:
• Lord SUMPTION: “Piercing the veil” = COMPANY + CONTROLLER ≠ TREATED AS SEPARATE PERSONS 1) Document states 2 companies operate as 1
SEPARATE LEGAL PERSONALITY *Salomon = accepted position in law, but do narrow exceptions apply?
• Narrow exception: Fraud, b/c intention to deceive Beckett
• Companies have separate legal personality ∴ S protected himself against liabilities of the business - Interpreted employment contract as group of companies forming a single entity
Brougham
o E.g. Owns property, party to contracts, commits crimes, sues etc. 2) Sham subsidiary, e.g. Lipman
- 2 undischarged bankrupts incorporated a company to defraud debenture holders
Salomon +
- Court: If company used to perpetrate fraud, may pierce the veil 3) Express/implied (conduct) agency of parent: Parent’s day-to-day control over subsidiary
- Boots + shoes sole trader, who incorporated a limited company
- Implied = high bar ∴ ↓ ability to PTV
- Sold sole trader business to company w/ £10k debenture to S (prioritized over unsecured creditors) EVASION
- S owned most shares + 6 family members held 1 share each • If company = ‘mere cloak/sham’ = PTV • Effective exception?
- Company went insolvent Gilford o + Courts willing to PTV to award compensation
- Liquidator argued incorporation = sham ∴ S personally liable - NON-COMPETE CLAUSE. When dismissed, incorporated a rival company o - Inconsistent approach
- CoA: Sham to operate as a single person company w/ “6 dummies” to satisfy formalities ∴ invalid - Court: Sham to use company to evade existing legal obligation ∴ issued INJUNCTION o - When claim is against corporate group, Adams lets parents hide behind separate legal personality
- Moralistic approach: Nominee members’ bad faith + overvalued sale
Lipman
- HoL: No, company = separate legal personality ∴ S not liable for its debts OTHER EXCEPTIONS TO SALOMON if PTV ≠ available
- L AGREED TO SELL LAND to X. To avoid sale, incorporated a company + transferred land to it
- Literal approach: Company validly created b/c Act required 7 shareholders TORT ACTIONS
- Claimed land belonged to company
∴ satisfied S’s debt before unsecured creditors Parent company liable in negligence
- Court: Sham to avoid honouring agreement ∴ ordered SPECIFIC PERFORMANCE against company
• Exception = parent’s assumption of responsibility
Gramophone - Trustor AB CHANDLER v Cape
- Wholly owned subsidiary retained profit > distributed via dividends - Director TRANSFERRED FUNDS from Trustor AB to another company (X) owned by him - Subsidiary employee = lung cancer b/c asbestos exposure from subsidiary’s negligent operations
- Court: Business of company > of shareholders ∴ focus on actions of directors > who has ultimate - Some ££ reached him personally - Court: Parent liable, b/c assumed DOC to advise subsidiary on H&S steps + ensure steps were taken
control of company - Court: X = sham company to misappropriate funds ∴ D personally liable to RETURN FUNDS - ARDEN LJ: Parent assumes responsibility to subsidiary employees for high-level advice/strategy
Macaura - LIMITED LIABILITY - 4 requirements to hold parent liable in negligence:
- M sold timber on his land to a company + insured timber in his name 1) Parent + subsidiary’s business = same
• PTV exceptions = rare, e.g. evasion cases
- Destroyed by fire, so M claimed insurance 2) Parent has/ought to have superior knowledge on H&S in that industry
Prest
3) Subsidiary’s system of work ≠ safe
- HoL: Property belongs to company, not shareholders ∴ only company could insure it - Husband controlled companies w/ LEGAL TITLE TO PROPERTIES
§ B/c separate legal personality = denied remedy to M who lost his personal fortune 4) Parent knew/ought to have foreseen subsidiary would rely on parent’s superior knowledge
- Wife wanted properties in DIVORCE PROCEEDINGS
for employee’s protection
- UKSC: Separate legal personality = BELONGED TO THE COMPANY, not H ≠ PTV
Lee + - Lord SUMPTION: Old piercing cases split into concealment + evasion cases
- L took insurance policy entitling widow to damages upon death if he was a company ‘worker’ § Q) Bypassing > piercing veil to hold parents liable?
1) CONCEALMENT ≠ piercing the veil § Yes: Proves (4) if parent regularly intervenes in subsidiary’s trading operations, e.g. production
- Died, but insurers claimed L being sole director + owning all, but 1 share ≠ employee
- If company conceals real actor, looking behind a company to find real actor ≠ PTV § No: Limited to H&S claims
- Court: Entitled to damages
- TAN: E.g. undercapitalization/assets + controller intermixed = masks true actor (controller)
- Company = separate legal personality ∴ can validly enter contract to employ L 2) EVASION = true ground for piercing the veil • But rare: Thompson limits scope of Chandler
- Lord MORRIS: Company = perpetual existence, but members change over time THOMPSON
- Husband transferred companies whilst harmonious w/ wife ∴ no intention to evade ≠ PTV
- E.g. M may retire from directorship, but employment contract ≠ affected - Lord MANCE: Cautious to state evasion = only exception, b/c may be ↑ PTV categories - Despite parent appointing director to subsidiary board, owes fiduciary duty to subsidiary > parent
- Lord NEUBERGER: No real PTV cases - Court: Coordinated activity + shared resources = normal business conduct for group subsidiaries
LIMITED LIABILITY
• May establish separate legal personality w/ unlimited liability to incur debts CONTRACT Directors’ personal liability
• But hard for limited liability w/o separate legal personality, b/c laws on limiting liability in clauses/notices • If PTV brings non-party into contractual relationships on un-agreed terms ≠ PTV • Courts ↑ willing to find directors personally liable for torts, esp. intentional torts (e.g. deceit) > negligence
precludes it VTB MCA RECORDS
- VTB bank gave loan to company X to buy dairy companies - Depends whether directors’ involvement goes beyond mere voting for/against action = vague test
(1) Risk
- But transaction arranged by M who owned both companies § Artificial for small companies w/ small meetings
• + ↓ Risk = ↑ investment
- Defaulted ∴ VTB argued PTV, so M = personally liable
o + HANSMANN: Personal assets safe from creditors’ reach Deceit
- Court: No PTV, otherwise turns non-party (M) into a liable co-contracting party
o - FREEMAN disagrees: Bank loans require shareholders to provide guarantees ∴ any debts owed to - Instead, use fraudulent misrepresentation, b/c PTV = last resort if no other action available PAKISTAN SHIPPING
banks = reclaimed from personal assets - Missed shipping date, but M gave documents for payment ∴ company X’s bank paid what was owed
• + Management takes ↑ risk knowing members won’t lose personally CORPORATE GROUPS *Despite subsidiary’s separate legal personality, insolvent ∴ PTV makes parent liable - Company X refused to pay bank
o - Irresponsible risk-taking • + Parent’s control over group ≠ same as passive shareholders *** - Court: If makes fraudulent misstatement = personally liable, b/c intention to deceive
o DUNN: Parents aware/control risks undertaken by subsidiary ∴ in a position to avoid unnecessary risks
(2) Transferring shares Negligence
• Inconsistent approach
• + Facilitates transfer of shares o Restrictive: WILLIAMS
o Unlike unlimited liability = ↑ likely to sue wealthy shareholders, personal liability ≠ vary by wealth ALIBAZERO - - Despite negligent misstatements on company letter-headed paper, director ≠ personally liable, b/c no
of other shareholders ∴ homogenous shares easily transferred - After transferred ownership of oil between 2 subsidiaries, ship sank ∴ 1 st company claimed loss personal dealings w/ plaintiff ∴ no reasonable reliance to establish AoR
(3) Creditors - Court: Each company = separate legal personality ∴ 2 nd company = true owner
- But limitation period ended ∴ neither could claim STATUTORY CREDITOR PROTECTION = statute creates exception to Salomon
• - Shifts monitoring to creditors ∴ shareholders become passive owners • S213 IA 1986: Fraudulent trading
VS.
o + HANSMANN: ↑ Suitable, b/c widely dispersed shareholder ownership o Knowing party carries on business w/ intent to defraud
o ↑ Liberal to PTV. But unique facts = statutory compulsory purchase orders ∴ PTV b/c parents benefitted
• + Certainty as to assets available to creditors § KEAY: “Intent to defraud” ≠ clear
as the real controllers
• + ↑Risk to creditors = can adjust terms to ↑ interest § E.g. One-off fraud = hard to prove business carried on for fraudulent purposes ≠ liable
o AGENCY
• - Small creditors lack bargaining power o Hard to prove “actual dishonesty”
Smith, Stone & Knight +
• Reform: Minimum capital requirement Patrick
- Subsidiary owned land = subject to CPO
o But ≠ comfort creditors, b/c company may have £50k now, but not next week - Director delayed liquidation for 6 months to issue debentures to himself∴ prioritised over
- Agency relationship, b/c parent fully controlled subsidiary ∴ parent entitled to compensation
unsecured creditors
(4) Tort victims o SINGLE ECONOMIC ENTITY: Degree of control over subsidiary, e.g. same board; parent owns all shares - Court: Actual dishonesty requires “real moral blame”
• - “Involuntary creditors”, b/c injured by companies they didn’t choose to do business w/ DHN +
o Unlike creditors, can’t research company to assess creditworthiness/take security over company - Parent owned 2 subsidiaries (subject to CPO)
property/ negotiate terms of skill + care - Court: PTV, b/c single economic entity
VS.
• Reform: Compulsorily ↑ liability, esp. tort victims
WOOLFSON -
o But unfair, creditors had opportunity to research company + negotiate terms
- Court: Parent had no control over landowners ≠ single economic entity ∴ not entitled to
compensation for CPO
