Topic 11, chapter 14: legal requirments when establishing a business enterprise

Saloman v Saloman & Co. Ltd (1897)

Mr Saloman sole trader sought to register his sole trader busineaa as a company and sell it to this newly formed company. Once incorporated, he received £39,000 for sale of this business to company. He left £10000 in company as a personal loan, it was intended that it would be paid back to him, he established himself as a secured creditor by taking out a mortgage debenture. Later, company went into liquidation owing money to creditors (including S). Company assets worth £6000 which S claimed. House of Lords stated he was entitled to money as the company had been correctly registered, there was an agreement between S and the company regarding the loan, he (secured creditor) was entitled to the money before unsecured creditors.

Authority for:

If a business register’s as a company in accordance with the statutory requirements, a company possesses its own legal personality. This is separate from the members/directors of a company.

Macaura v Northern Assurance Ltd (1925)

Timber mill owner sold his timber to a company of where he and his nominees were the only shareholders. Company owed him money and he insured the company’s assets in his own name rather than through the company. When timber was destroyed in a fire, Macaura attempted to claim on the insurance policy, he was told he had no insurable interest in the company’s assets and was illegible to claim.

Authority for:

Company and he were separate legal entities, the insurance should have been made through the company rather than him personally.

Collins Stewart Ltd v Financial Times Ltd (2005)

Collins Stewart sought damages for defamation after a FT article. Losses claimed for the damage to the company’s market capitalisation value amounted to over £230 million.

Authority for:

court refused damages:

• damage claim was too speculative (claimant tried to base damages on a possible future market capitalisation of the company), damages must be provable

• defamation claim itself was “misconceived and untriable” by the judge

• court will not lift the veil to impose liability on directors/shareholders unless exceptional circumstances apply, the mere fact that a company is owned by another company does not justify piercing the veil.

exceptional circumstances= fraud, sham companies etc

Veil of incorporation

A: Separate legal personality:

Company is a separate legal person from its directors, its shareholders and its employees

This means:

• the company owns its own assets

• it’s liable for its own debts

• can sue/be sued in its own name,

B: limited liability

• shareholders are only liable up to the amount they invested, not personally responsible for company’s debts

C: “veil” metaphor

• legal separation between the company and individuals in it

• courts rarely lift the veil unless they have a strong reason to

Adams v Cape Industries Plc (1991)

Cape Industries (English company) head of a group of companies which mined asbestos in South Africa. Its subsidiary (Capasco) had a marketing subsidiary based in USA. Claims brought against US subsidiary for personal injury associated with working with asbestos and these claims were settled. Following a reorganisation, there were no assets in the US company and the claimants sought damages from Cape in UK courts. Court of Appeal ruled Cape could only be subject to the US jurisdiction if the corporate veil was pierced which would only occur if Cape was treated as a single economic unit, that it had been established as a facade or the US subsidiary were legal agents of Cape.

Authority for:

Rationale for not lifting veil→ use of corporations with independent subsidiaries to protect the remainder of the group was a legitimate use. The companies were not a single economic unit and there was no evidence that the subsidiary was a sham or facade, agency relationship could not be applied.

Jones v Lipman (1962)

L entered intro sale of land contract but changed his mind. To avoid the contract, formed a company and transferred the land to the company. In refusing to complete the sale, he argued that the land belonged to the company (separate legal entity).

Authority for:

Court held company to be a sham as he created it to avoid the contract. Specific performance made against the owner which compelled the completion of selling the land. (Veil lifted)

Gilford Motor Co. Ltd v Horne (1933)

Defendant was a managing director of the claimant company and was subject to a restraint of trade clause which prevented him from soliciting Gilford’s customers on leaving the business. After his termination, he formed a company and stated this company employed him, thus began soliciting G customers in breach of the restraining clause. He argued the clause was binding upon him rather than the company but Court of Appeal granted him an injunction to restrain him from breaching the clause. It lifted the veil as court considered it to be a sham.

Authority for:

Veil lifted when the company’s formation is a device/strategem to evade effects of a contractual term. Veil lifted in times of fraud or sham.

Vantaan kaupunki v Skanska Industrial Solutions Oy, NCC Industry Oy, Asfaltmix Oy (2019)

Heard by Court of Justice of the European Union.

Seven companies formed a cartel, were in breach of national and EU competition laws. When another company acquired three of those companies it was fined for the conduct of the companies despite not participated in the anti competitive activities. Separate legal personality argument did not prevent parent company being subject to fine. Court of Justice consider that to allow this would enable corporations to evade liability for infringements of competition laws through restructurings or sales.

Authority for:

Parent company may be held jointly/severally with its subsidiary. May result in acquirer of a company unknowingly acquiring liability in damages when buying a company where the subsidiary company has infringed the law. (Still elements of uncertainty surrounding this law)

Khan v Miah (2001)

Three individuals set up a restaurant opening a joined bank account, got a loan, bought premises and equipment and advertised the new venture. Before they began trading, one individual dropped out. The others continued, obtained profits and the first individual attempted to obtain a share in capital and profits. Question surrounding whether a partnership existed.

Authority for:

House of Lords concluded that a partnership can exist in law before the business starts trading as long as the parties have already begun activities what were “part and parcel” of the business they agreed to run e.g bought equipment.

M Young Legal Associates Ltd v Zahid (2006)

Solicitor in a law firm laid a fixed amount, had no entitlement to share in firm’s profits. Question raised to his status as a partner.

Authority for:

Solicitor was a partner of the firm, no minimum threshold as to a person’s rights to receive profits or their involvement in management before they can be considered a partner. What matters is what the parties intended and how they behaved, not the size of the role.

Hamlyn v Houston and Co. (1905)

Aspect of defendants business was to get commercial information relating to its competitors. Houston (firm partner) got confidential information on Hamlyn by bribing one of its employees. The way in which this information was retrieved were contrary to the defendant’s instructions. In a claim for damages for the losses sustained by Hamlyn, it sued the company rather than the partner at fault.

Authority for:

Defendant company was held jointly vicariously liable for Houston’s actions. Obtaining information was lawful as it was part of Houston’s role at the firm but gathering it through unlawful means was also within this scope of his authority.

If one partner commits a tort/crime in the course of the business, the partnership will be liable if this was within the offending partner’s authority.

Dubai Aluminium Co. Ltd v Salaam (2003)

Solicitor allegedly involved in dishonest practice in the drafting of documents. Consequently, damages were sought not only from him but his partners.

Authority for:

Firm was held liable for the solicitor’s wrongdoing because what he did was closely connected to the kind of work a solicitor normally does and it counted as being done in the ordinary course of the partnership business.

Under the partnership act 1890

Bentley v Croven (1853)

Craven and 3 others were partners in a sugar refinery business. He was responsible for purchasing sugar for the firm. Instead of buying for the partnership directly, he bought sugar privately on his own account, sold it to the partnership at the market price and kept the profit he made on the resale without telling the other partners.

Authority for:

Craven was liable to account to the other partners for the profits made on the contract.

Everet v Williams (1725)

Parties were highwaymen who entered into a partnership to share the proceeds from their criminal activities. E and W argued over the share of the proceeds leading to E bringing a claim for damages against W.

Authority for:

Damages action dismissed as it was based on criminal activities by the parties. Court fined the lawyers representing them and required them to pay the court for bringing the case.

R v ICR Haulage Ltd (1944)

Managing director and haulage company were charged with conspiracy to defraud. Defendants argued that the company should not be convicted of an offence which required mens rea (guilty mind).

Company argued:

• company is artificial person

• cannot form a guilty mind

• cannot be guilty of conspiracy

Authority for:

Managing director’s mind was the company’s mind for the purposes of criminal liability as he:

• controlled company operations + made decisions on its behalf

• acted as a brain

Braymist Ltd v Wise Finance Co. Ltd (2002)

Claimant establishing a company at the same time selling land. Contract for the sale was signed by solicitors of the alleged company but at the time had not yet been incorporated. Respondent was unaware of the non incorporation of the company.

Authority for:

Solicitors personally liable for contract made as it was in their name, couldn’t be in the name of the company as at the time did not exist. Gave rights to the solicitors to enforce the contract.

Halifax Plc v Halifax Repossessions Ltd (2004)

Claimant won a trade mark infringement action where the defendant was ordered to stop using the infringing name in business. Defendant did this in practice but did not change its registered company name at Companies House. Claimant tried to enforce judgement by asking court to order ROC to remove Halifax from company’s registered name.

Authority for:

Court of Appeal stated that court cannot order Registrar of Companies to change/remove a company name even where the company has been found liable for trade mark infringement.

Croft v Day (1843)

Day and Martin (we’ll establish boot polish firm) named after the founders. Firm bought by Croft who continued trading using the same name. Defendants had the same surname and established the same business name to mislead potential buyers that the company was the same as the original. Court held that the new entrants to the market had attempted to pass the business off as the original, granting Croft and injunction to prohibit the use of the new business’s name.

Authority for:

Where a business name is already in existence, the use of the same/very similar name by others in an attempt to mislead the public is considered a breach of ‘passing off’.