Law Cases & Legislation

Salomon v A Salomon & Co Ltd. (1897)

Once a company is properly incorporated, it becomes a separate legal person distinct from its shareholders and directors.

Therefore, the company's debts and liabilities belong to the company, not to its members, even if one person owns and controls almost all of the shares.

Lee v Lee's Air Farming Ltd. (1961)

Because a company is a separate legal person from its shareholders and directors, a controlling shareholder and director can also be an employee of that company under a valid contract of service.

s 213 of the Insolvency Act 1986 - fraudulent trading

A director or other person who knowingly helps run a company fraudulently can be made personally liable to compensate the company's creditors.

The liquidator must show:

1. The company was wound up (affairs brought to an end)

2. The business was carried on for a fraudulent purpose

3. The defendant knew about and participated in the fraud

s 214 of the Insolvency Act 1986 - wrongful trading

A director or other person who failed to take steps to limit losses to creditors while knowing of the inevitable insolvency of the company, can be made personally liable to compensate the company's creditors.

The liquidator must show:

• The company has gone into insolvent liquidation or administration.

• Before that happened, the director knew or ought to have known that there was no reasonable prospect of avoiding insolvency.

• The director failed to take every step that a reasonably diligent person would have taken to minimise losses to creditors.

Test for Section 214

• Subjective test: what the particular director knew

• Objective test: what a reasonably diligent person carrying out the same functions would have known

Re Produce Marketing Consortium Ltd (1989)

The court held the directors liable because they continued trading when insolvency was inevitable, thereby increasing the losses suffered by creditors.

Prest v Petrodel Resources Ltd (2013)

The corporate veil can only be pierced where a person uses a company they control to evade or frustrate an existing legal obligation. It is not enough that the person owns or controls the company, or that piercing the veil would be fair.

Adams v Cape Industries plc (1990)

A parent company and its subsidiary are separate legal entities. The corporate veil will not be pierced simply because the parent company controls the subsidiary or because it seems fair to do so.

Company Act 2006

• Registration & constitutional requirements within the company's documentation

• The power and obligations of the company's officers

• The mechanisms for making decisions

• Obligations to publish identified types of information at specified times

s31 Companies Act 2006

Unless a company's article specifically restrict the objects of the company, its objects are unrestricted.

Economic Crime and Corporate Transparency Act 2023

Introduced to help deter those wishing to use companies for illegal purposes.

• Identity verification

• Registered (email) addresses

• Lawful purpose statement

• Registrar powers

Articles of Association - CA 2006 s.20 Model Articles

Written rules about running the company agreed by the shareholders or guarantors, directors and the company secretary.

s21 Companies Act 2006

Model Articles can be changed by special resolution.

s33 Companies Act 2006

A company's constitution is a contract between the company and its members. Both the company and every member must follow its rules as if they had all agreed to them personally.

• Specify amount of shares and shareholders (if limited by shares)

• Specify guarantee amount and guarantors (if limited by guarantee)

Chaudhury v Prabhakar (1988)

It is possible to appoint an agent by word of mouth or in writing.

• Does not necessarily include all the terms binding the parties

Hely-Hutchyhead v Brayhead Ltd Ltd (1968)

Actual authority may be expressed or implied.

• Implied authority arises from the conduct of the parties and the circumstances of the case.

Freeman & Lockyer v Buckhurst Park (Mangal) Properties Ltd (1964)

The requirements for apparent (ostensible) authority:

1. A representation is made that the agent has authority

2. The representation is made by someone with actual authority

3. The third party relies on that representation

4. The principle has the capacity to enter the contract

China-Pacific SA v Food Corporation of India (The Winson) (1982)

Agency of necessity arises where a person must act to protect another's property in an emergency and it is impossible or impracticable to obtain instructions from the owner.

Koenigsblatt v Sweet (1923)

Ratification may be communicated expressly or impliedly through the principal's conduct.

• Formal notice to the third party is not always required

Yonge v Toynbee (1910)

An agent's authority ends automatically if the principal becomes mentally incapacitated.

• If the agent continues to act and represent that they have authority - they may be liable for the breach of the implied warranty of authority

  • Even if they honestly believed their authority still existed

Turpin v Bilton (1843)

To obey instructions

• An agent must follow the lawful instructions of the principal.

• If the agent ignores instructions and causes loss, they may be liable to the principal.

• However, an agent does not have to carry out an illegal or void act.

Chaudhry v Prabakhar (1989)

Of care and skill:

• An agent must use reasonable care and skill when carrying out their duties.

• If they fail to do so, they may be liable for breach of contract or negligence.

• The standard is judged objectively: what would a reasonably competent person in that position have done?

Bertram, Armstrong & Co (1830)

Of personal performance:

• An agent is generally expected to perform the task personally.

• They cannot delegate their authority to someone else unless:

  • the principal authorises delegation,

  • custom allows it, or

  • it is necessary in the circumstances.

Boardman v Phipps (1967)

A fiduciary must not make an unauthorised profit or place themselves in a position where their personal interest may conflict with their duty.

Said v Butt (1920)

Where the identity of the contracting party is important, an undisclosed principal cannot intervene and enforce the contract.

The Commercial Agents (Council Directive) Regulations 1993

Traditionally, the rights and duties of agents and principals came from common law.

• However, for commercial agents, these rights are also protected by legislation through the Commercial Agents (Council Directive) Regulations 1993, later amended in 1998.

Edgington v Fitzmaurice (1885)

Misrepresentation to investors:

A false statement of a person's intention is an actionable misrepresentation because a person's state of mind is a fact.

Register of Directors: s162 CA 2006

There is a requirement that every company must keep a register of its directors.

Information that must be included:

• Name

• Former directors

• Nationality

• Occupation

• Country of residence

• Service address for each director

Re Hydrodam (Corby) Ltd (1994)

Test for a shadow director:

1. Actual directors of a company must be identifiable

2. The alleged shadow director must have directors on how to act

3. The directors must have acted in accordance with his instructions

4. They must have been accustomed so to act

S168 Companies Act 2006

Shareholders can remove a director by ordinary resolution.

• Special notice must be given

• The director has the right to make representations and be heard

• Articles of Association cannot completely prevent shareholders from exercising this statutory right

Bushell v Faith (1970)

A company's Articles of Association may grant a director special voting rights on a resolution for their removal - provided those rights do not directly remove the statutory power of shareholders to propose and vote on the resolution.

• Shareholders still retain the legal right to attempt to remove a director.

  • However, the Articles can make removal more difficult by giving the director additional voting power.

Company Directors' Disqualification Act 1986

Aims to protect the public, creditors, and businesses by preventing unsuitable individuals from acting as company directors.

1. Conviction of an indictable offence in connection with company management

2. Fraud during the winding-up of a company

3. Persistent default in filing returns

4. Unfitness to be concerned in the management of a company after insolvency has occurred

5. Undischarged bankrupts

6. Mental health grounds

7. Person disqualified by the Court

8. Absence from director meetings

Article 3 of the Model Articles

"Subject to the Articles, the directors are responsible for the  management of the company's business."

• Directors have the authority to run the company on a day to day basis

• Exercise all company powers unless the Companies Act or the Articles reserve a matter for shareholders

• Shareholders own the company, but directors manage it

Royal British Bank v Turquand (1856): s39 & s40 CA 2006

An outsider dealing with a company in good faith is entitled to assume that the company's internal procedures and formalities have been properly complied with.

s39 Companies Act 2006

Company’s capacity:

Prevents contracts being invalid because the company exceeded its objects or constitutional limits.

• Focuses on the company

s40 Companies Act 2006

Directors’ authority:

Protects outsiders dealing with directors who exceed their authority.

• Focuses on third-parties dealing with the company

s171 Companies Act 2006

Duty to act within the company’s powers:

A director must always act in a way allowed by the company's Articles of Association and decisions made by the Company.

s172 Companies Act 2006

Duty to promote the success of the company:

A director must act in the way he considers, in good faith, would most likely to promote the success of the company for the benefit of the shareholders as a whole.

Directors must consider:

• Consequences of long-term decisions

• Interests of company's employees

• Need to foster the company's business relationships with suppliers, customers and others

• Impact of company's operations on the community and environment

• Need for the company to maintain a reputation for high standards of business conduct

• Need to act fairly between shareholders of the company

s173 Companies Act 2006

Duty to exercise independent judgement:

Directors must make their own decisions about what is best for the company - they cannot simply follow the instructions of others.

s174 Companies Act 2006

Duty to exercise reasonable care, skill and diligence:

A director will be judged according to what would be reasonable in his role as well as any particular skills or knowledge he has.

s175 Companies Act 2006

Duty to avoid conflict of interest:

A director must avoid any situation where he has or could have a conflict or possible conflict of interests with those of the company.

• Cannot exploit property, information or opportunity that comes his way because of company activity

s176 Companies Act 2006

Duty not to accept benefits from third parties:

To prevent the taking of bribes but may also include benefits from being director, shareholder, employee or advisor to a competing company.

s177 Companies Act 2006

Duty to declare interests in a proposed transaction or arrangement with the company:

A (shadow) director must declare the nature and extent of any interest he has in a proposed transaction or arrangement to the Board of Directors whether he is directly or indirectly interested in it.

• A director is deemed to be aware of matters which he ought reasonably be aware of

s178 Companies Act 2006

Remedies for breaches of duties:

• Damages / compensation

• Return of profits

• Restoration of company property

• Recession

• Injunction

• Constructive trust

s271 Companies Act 2006

Every PLC must have a company secretary.

• Private companies are not required to appoint a company secretary

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd (1971)

A company secretary has apparent (ostensible) authority to enter into contracts that fall within the usual administrative functions of a company secretary, and third parties dealing in good faith can rely on that authority.

Caparo Industries plc v Dickman (1990)

Caparo Three-Part Test

A duty of care in negligence will only arise where:

1. Damage is reasonably foreseeable

2. There is a relationship of proximity between parties

3. It is fair, just and reasonable to impose a duty of care

 

The court held that auditors prepare accounts to enable shareholders as a body to exercise their rights in general meetings, not to assist individual investors in making investment decisions.

Kelner v Baxter (1866)

Promoters are personally liable on pre-incorporation contracts because a company cannot ratify (approve) a contract made before it came into existence.

s51 Companies Act 2006

A person who contracts on behalf of a company before it is incorporated is personally liable on that contract.

Bristol & West Building Society v Mothew (1998)

“The distinguishing obligation of a fiduciary is the obligation of loyalty”

Foss v Harbottle (1843)

Where a wrong is done to a company, the company is the proper claimant, and minority shareholders cannot usually sue unless an exception applies.

• Proper Plaintiff Rule: a wrong suffered by the company must be remedied by the company itself.

• Majority Rule Principle: if the alleged wrongdoing can be approved or ratified by a majority of shareholders, the courts will generally not interfere at the request of a minority shareholder.

Howard Smith Ltd v Ampol Petroleum Ltd (1974)

Directors must exercise their powers for the purposes of which those powers were conferred, even if they honestly believe they are acting in the company’s interest.

Re Smith & Fawcett Ltd (1942)

The court will not second-guess directors' business decisions if they genuinely believed they were acting in the company's best interests.

Mutual Life Insurance Co of New York v Rank Operations Ltd (1985)

Directors must act fairly between shareholders, but fairness does not require that every shareholder be treated exactly the same.

Fulham Football Club Ltd v Cabra Estates PLC (1992)

A director must make decisions using their own judgment and cannot simply let someone else tell them what to do.

However, directors can enter into contracts on behalf of the company that limit their future freedom of action.

Re Cardiff Savings Bank (1892)

A director’s duty of care was judged according to that director’s own knowledge and experience, rather than an objective reasonable director standard.

Re Barings PLC (No5) (1999)

Directors have a continuing duty to:

1. Acquire and maintain sufficient knowledge of the company's business.

2. Monitor the company's affairs.

3. Supervise delegated functions.

Bhullar v Bhullar (2003)

Directors must not exploit a business opportunity for personal gain where there is a real sensible possibility of conflict between their personal interests and their duty to the company.

s2 Fraud Act 2006 - false representation

Dishonestly make a false representation and intend to:

• Make a gain for themselves or another

• Cause loss (or risk of loss) to another

Lennard’s Carrying Company Ltd v Asiatic Petroleum Company Ltd (1915)

Identification Doctrine (Directing Mind Theory):

A company can possess mens rea through their senior officers who are the company's controlling mind.

• The acts and intentions of these individuals are treated as the acts and intentions of the company itself

Tesco Supermarkets Ltd v Nattrass (1972)

Only individuals who represent the company’s directing mind and will can have their mens rea attributed to the company.

• Lower-level employees and managers are generally not considered the company's mind

s196 Economic Crime and Corporate Transparency Act 2023

A body corporate or partnership will be guilty of an economic crime if a senior manager commits the offence while acting within the actual or apparent scope of their authority.

• Applies to all commercial organisations

• No statutory defence to rely upon

• Organisations will have to rely on their compliance programmes

Non-compliance to The Economic Crime and Corporate Transparency Act 2023

• Unlimited fines for organisations.

• Potential imprisonment for directors, officers, and individuals involved in offences.

• Director disqualification.

• Asset confiscation and recovery of criminal proceeds.

• Greater investigation and enforcement powers for Companies House and law enforcement.

s1 Fraud Act 2006

Fraud can be committed in three different ways:

1. False representation

2. Failure to disclose information when there is a legal duty to do so

3. Abuse of position

Bounce Back Loan (2020)

• Introduced by the UK Government in May 2020 during the COVID-19 pandemic.

• Designed to provide quick financial support to small and medium-sized businesses (SMEs).

• Administered through banks and backed by a 100% government guarantee.

• The scheme prioritised speed over extensive checks, creating opportunities for fraud.

Ivey v Genting Casino (2017)

Two-Step Ivey Test:

1. Determine the defendant's actual state of knowledge or belief about the facts

   • What did the defendant genuinely know or believe?

2. Assess whether the conduct was dishonest by the standards of ordinary decent people

   • An objective test - it does not matter if the defendant believed they were acting honestly

s3 Fraud Act 2006 - failure to disclose information

A person is in breach of this section if they dishonestly fails to disclose to another person information which he is under a legal duty to disclose and intends, by failing to disclose the information.

• Intending to make a gain for himself or another

• Intending to cause loss to another or to expose another to a risk of loss.

R v Firth (1990)

A representation does not need to be express - it can be made through implied conduct or by failing to correct a misleading impression.

s4 Fraud Act 2006 - abuse of position

A person is in breach of this section if they occupy a position in which he is expected to safeguard, or not to act against, the financial interests of another person, dishonestly abuses that position, and intends, by means of the abuse of that position.

• Intending to make a gain for himself or another

• Intending to cause loss to another or to expose another to a risk of loss.

R v Shaw (2026)

A person abuses a position when they exploit a position of trust in which they are expected to protect another person's financial interests, acting dishonestly to make a gain or cause a loss.

s199 Economic Crime and Corporate Transparency Act 2023

An organisation will be criminally liable where:

• A specified fraud offence is committed by an employee, agent or other 'associated person' for the organisation's benefit

• The organisation did not have 'reasonable' fraud prevention procedures in place

 

It does not need to be shown that company managers ordered or knew about the fraud.

Defence against fraud

The company can avoid liability by showing it had reasonable procedures in place to prevent fraud.

Regal (Hastings) Ltd v Gulliver (1942)

The director must hand over any profit made from the breach, even if the company itself suffered no loss.