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

CA 2006 s.31

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.

CA 2006 s.21

Model Articles can be changed by special resolution.

CA 2006 s.33

The provisions of a company's constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions

• 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.