Company Law Key

Key Concepts on the Corporation

AGENCY

Appointment of agents is one of the most common commercial arrangements in

business. Agents can be used in domestic and international trade.

An agent is a person who has legal authority to conduct business on behalf of another

person, known as a principal. An agent does not contract on his/her own behalf, but

on behalf of his/her principal.

E.g. Alice (agent), who lives in Sydney, makes a contract with Bernie (third party), who

lives in Adelaide, on behalf of Peter (principal), who lives in London. Legally the

contractual agreement is made between Bernie in Adelaide and Peter in London. Agency is

an exception to privity of contract.

“Normally there will be a contract between principal and agent, and agents will be paid a

salary, fees and commission or a share of the profits” (Marsh & Soulsby). Agents who break

the terms of their agency contracts or act negligently will become liable to their principals

and have to pay compensation (damages).

Note: a director may be an agent of a company and bind the company, and a partner is an

agent of a partnership and can bind the partnership.

The duties of an agent

1. Obedience - Obey lawful instructions;

2. Skill - Use care and skill expected of a person in their profession when performing his

duties;

3. Performance - Perform duties personally (however, there are exceptions e.g. if the

principal expressly authorises delegation);

4. Fiduciary Duties - The relationship between an agent and principal is a fiduciary

relationship. What is a fiduciary relationship? It is a relationship where one of the parties

can be expected to trust the other implicitly. An agent has the following Fiduciary Duties,

he MUST:

(a) Avoid any conflict of interest between his own personal interests and those of the

principal - IMAGEVIEW MANAGEMENT LTD V JACK [2009]

(b) Not make a secret profit - BOARDMAN V PHIPPS [1967];

(c) Not take a bribe, which includes a commission or other inducement -

(d) An agent must keep records of any dealings on behalf of their principal & they

must be available for inspection. An agent must ensure their own property is kept

separate from their principal’s property. The agent must account to the principal for

all monies arising from the agency; and

(e) An agent has a duty of confidentiality, which could carry on even when the agency has

ended.

1. 2. 3. The rights of an agent

to be indemnified against losses and liabilities, provided the agent has acted properly

within the limits of his authority;

to be repaid expenses and any agreed remuneration for his services;

to exercise a lien over property owned by the principal which has lawfully come into

his possession, pending payment of monies owed to the agent.

Creation of agency

An agent enters into contracts with third parties on the principal’s behalf, but he has to have

authority to do so in one of the following ways:

1. 2. Agency by consent - this may be express or implied, in writing or oral;

Agency by estoppel or “holding out” - where the words or conduct of the

principal leads a third party to presume that a person has the authority of an

agent and the third party acts upon this (i.e. the agent has apparent or

ostensible authority – see later);

Agency of necessity - where there is an existing contractual relationship but

there is an emergency, it is impossible to communicate with the principal,

the property or interests of another are in imminent jeopardy, they act in good

faith and the action was reasonable and prudent;

Ratification - if an agent makes a contract on behalf of a principal but does

not have authority, the principal can later ratify the contract and so may

validate past acts but the ratification must be within a reasonable time and it

does not validate future acts.

Ratification may only be done if certain conditions are satisfied. See further in your

reading.

3. 4. Different types of authority of an agent

A contract made by an agent is binding on the principal and the third party only if the agent

was acting within the limits of his authority. There are 3 distinct types of authority:

1. Actual express authority which can be oral or in writing;

2. Implied actual authority - it is implied from the nature of the agent’s activities or what

is usual in the circumstances. So unless third parties know otherwise they are entitled to

assume that an agent has implied actual authority - WATTEAU V FENWICK [1893] -

The principal, Fenwick, bought a pub/hotel and employed the previous owner, Humble as

the agent to manage it. Humble’s name was on the bar signage and the licence to sell alcohol.

However he was expressly instructed by the principal not to buy tobacco products on credit

on the principal’s behalf. Contrary to these instructions he bought cigars on credit from a

salesman, Watteau, who had previously dealt with him, when he was the owner, and who

was unaware of the change of ownership. The agent, Humble, could not pay and he asserted

that the principal, Fenwick, was bound.

Held: the principal was liable for the actions of the agent as the purchase was within the

usual authority of an agent and the salesman was unaware of the restriction of the usual

authority.

3. Ostensible or apparent authority - this is the authority which Lord Denning said is “the

authority of an agent as it appears to others”. It arises where the principal represents to a

third party that the agent has authority and if the third party acts on the principal’s

representations and agrees a contract with the agent then the principal is estopped from

denying the agent’s authority. Ostensible authority can go beyond what is usual and

incidental.

Liability of the parties?

See further in your reading.

BUSINESS VENTURES

Sole Trader

A sole trader is one human individual who is in business on his own.

Although the business is owned by one person, he need not work alone and the business may

employ a large number of staff.

Sole traders do not have to register as their business is private.

If the sole trader expects his business takings to be more than a set amount a year he must

register for VAT (like companies and partnerships).

They are self-employed and must register as such with HMRC as soon as they can after

setting up the business, to ensure that they pay own taxes.

A sole trader can keep all the profits of the business after he has paid tax on them, but also

must bear all losses personally, which can mean all of their personal wealth e.g their house,

may be at risk. The courts can set aside transfers which have been made between family

members in order to avoid creditors.

Partnership

A partnership is defined as the relationship, which subsists between persons carrying on a

business in common with a view of profit. As noted above, partners are the agents of each other

and therefore have the authority to bind the partnership, in the absence of specific restrictions.

We have three kinds of partnership as outlined below.

(a) “Ordinary” Partnership - under the 1890 Partnership Act, which is the standard form.

It may engage in any type of business. All partners can manage the business and are agents

for each other. Each individual partner pays his own tax on his share of the partnership

profits. The Act regulates how the partnership is run, eg each partner has an equal share in

the profits, how partners can be replaced, dissolving a partnership, a duty to share losses,

indemnifying other partners. It is preferable to have a written partnership agreement which

sets out these provisions, particularly where the partners do not want the Act to apply by

implication, eg they may wish to share in the profits in proportion to their individual capital

contribution rather than equally, as set out by the Act, or limit the authority of certain partners

to bind the firm in certain circumstances.

(b) Limited Partnership - under the Limited Partnerships Act 1907. These are rare and

should not be confused with an LLP. Partners contribute capital to the business but are

not entitled to bind the business or participate in its operation, their personal liability is

limited to the amount of capital invested. However, in addition, the partnership must have

at least one general partner, who runs the business and who has unlimited liability. Such

partnerships must register with the Registrar of Companies. In fact very few such

partnerships exist, as it has proved easier to benefit as a private limited company or stay

under the 1890 system.

(c) Limited Liability Partnerships - under the Limited Liability Partnerships Act 2000.

What was the reason for passing this Act? Before the establishment of the law relating to

LLP’s, partners were jointly and severally liable for the unlawful acts of another partner,

wherever in the world that partner operated, so a partner in London could be personally

liable for the unlawful acts of a partner in e.g Brazil or any other part of the world. This

was the case for many solicitors’ firms. Under the Act, LLP members now have limited

liability.

An LLP is an incorporated partnership, with a legal personality separate from its members,

who have limited liability. It is formed by being incorporated under this Act and is subject

to regulation similar to that of a registered company. It must register with the Registrar of

Companies and, whilst it carries on business, must file certain documents with the

Registrar. These are hybrid businesses, in that they are artificial legal persons

(corporations) but not companies, and have some similarities with ordinary partnerships,

e.g. LLP members pay their taxes individually in accordance with their share of the

profits. Members are partners, not shareholders. Instead of directors, it has designated

members to manage different aspects of the LLP.

Companies

The key point about companies is that they are artificial legal persons with a separate legal

identity from the persons who own the shares and who, as a result may control the company

and whose liability is generally limited, unlike sole traders or partners.

Salomon v Salomon [1897] is a landmark judgment and held that companies are a separate

legal entity from persons who own and control them (see later). This is known as the ‘veil

of incorporation’ which may be lifted/pierced on certain grounds.

Company law is now based on the Companies Act 2006 and its subordinate legislation, which

has gradually replaced the Companies Acts 1985 and 1989. The basic classification of

companies is still ‘public’ or ‘private’.

A private company is identified by having ‘Ltd’ or “Limited” in its business name (unless it is

a Private Company limited by guarantee, then no ‘Ltd). A public limited company contains

PLC in the name.

Types of Company

Private companies - They are mostly limited by shares; a minority are limited by

guarantee or are unlimited, (these tend to be charities or pension trustee companies). They

are typically small or medium sized. However, some large companies are private.

A private company must have at least one director but need not have a company secretary,

nor does it have to state any authorized share capital and there is no limit on the amount of

share capital which a private company can have. The company must file audited accounts

within 9 months of its financial year end, however there are some audit exemptions

regarding the content of accounts for small and medium companies.

Please also note that there are single member companies which means that a public or private

company can be formed with only one member.

There is also a distinction to be drawn between small and medium sized companies as well.

See further in your reading.

A private company limited by shares must end its name with ‘Ltd’ or ‘Limited’. An

unlimited private company must not include either designation in its name.

Public companies – A public company is registered as a public company. It is limited by shares

and must have a minimum of £50,000 share capital allotted to the shareholders, at least 25% of

which must be paid up. It must have a minimum of 2 directors, it must also have a company

secretary, hold an annual general meeting each year and file accounts within 6 months of its

financial year end. A Plc may or may not be quoted on a recognised stock exchange; if it is

quoted it can issue shares to the general public as investors. Plc’s are generally covered by

more stringent regulation and codes of conduct than private companies.

The public company name must end with either ‘public limited company’ or its shortened form

Plc. The limitation applies to the personal liability of the members.

Consequences of Incorporation

Separate Legal Entity

As stated above, companies are a separate legal entity from the persons who own and control

them.

SALOMON v SALOMON & Co Ltd [1897] - Aaron Salomon had a successful (sole trader)

business making and selling boots and shoes. He formed a company and sold his business to

that company. He became a shareholder of the company. In addition, he loaned £10,000 to

the company, in the form of a debenture.* This meant that Mr S would have priority on the

company assets if it closed down without sufficient funds to pay all its debts. Market

conditions changed and Salomon &Co Ltd became insolvent. Mr Salomon’s shares became

worthless and he was held not liable personally for the company’s debts, because he and the

company were separate legal persons. The liquidator refused to recognise the distinction

between Mr Salomon and the company itself, as separate legal persons. His argument was

upheld by the High Court and the Court of Appeal. The HL unanimously reversed both

decisions, ruling that as the statutory formalities in forming and registering the company had

been followed, the company was a separate legal person from Mr Salomon. He was also

entitled to some of the company’s assets (£6k) in repayment of his debenture loan, even

though the creditors, who had supplied the raw materials, did not receive anything.

*(Debenture = a contract between a creditor and the company for a loan to be repaid with

fixed interest, which must be paid before shareholders are paid and even if it means that trade

creditors get no payment at all).

MACAURA v NORTHERN INSURANCE Co [1925] - M formed a company, the main

asset of which was tree plantations. M owned shares in the company. M took out an insurance

policy in his own name against damage to those tree plantations. These were damaged by fire

and he claimed compensation. Held: M had no insurable interest as the company owned the

tree plantations and should have insured its own assets. This illustrates the separate legal

personalities of the company and its shareholders.

Piercing the corporate veil

The Courts are usually very reluctant to ‘lift the veil’, but may do so to expose the commercial

reality of a situation, e.g to defeat fraud or illegality.

PREST V PETRODEL RESOURCES Ltd (2013)

See your text book for details of the case.

The corporate veil “can be pierced in very limited circumstances to prevent the abuse of a

company’s legal personality. This applies only when the person deliberately evades an existing

legal obligation, liability or restriction by interposing a company under his control. Generally

the relationship between the controller of a company and the company will mean the abuse can

be prevented without piercing the corporation”

Macintyre (2018)

In this case the court did not pierce the veil because there was no evidence that Mr. Prest had

set up the companies to avoid the obligations in his divorce. However, they had evidence that

Mr. Prest had provided the money to buy the companies so the court held the company held

the property on trust for Mr. Prest and so the company could be ordered to transfer the property

to Mrs. Prest.

GILFORD MOTOR Co Ltd v HORNE [1933] - A case of ‘lifting the veil’ (to prevent fraud

/ misuse of corporate status). Horne was an ex-employee of GM Co and his employment

contract had a clause preventing him from ‘stealing’ customers from GM after he had left

their employment. He attempted to evade this restriction by forming a new company, which

he controlled and through which he solicited his ex-employer’s customers. He argued that his

new company was not the legal person prohibited from attracting customers from GM Co.

Held: the veil was lifted to reveal his company as a mere cloak or sham designed to steal the

customers and an injunction was granted against both the company and Horne enforcing the

clause.

JONES v LIPMAN [1962] 1WLR - L made a contract to sell land to J but changed his mind

and refused to sell. L then formed a company, of which he was the director and shareholder,

and sold his land to it. He knew that he would be liable personally to J for breach of contract,

but argued that ‘his’ new company owned and should be able to keep the land. J sued for

specific performance of the contract for the sale of the land. Held: that L was abusing the

law and the Judge decreed specific performance by both L and his company. This is another

example of ‘lifting the veil of incorporation’, not following the doctrine of separate legal

personality, in order to defeat fraud or dishonest behaviour.

Limited Liability

One of the key consequences of the fact that a company has a separate legal identity to its

members is that its members may enjoy limited liability. This is the case where a company

is limited by shares or by guarantee.

If a company limited by shares is unable to pay its debts, the shareholders will lose no more

than the value of their paid up shares. They therefore have a personal liability for the debts

of their company, but only up to the maximum value of their shares. As an example, imagine

that you are a shareholder in A Ltd. You invest £1000 in the company, buying shares 1000

shares of £1 in value. If the company cannot pay its debts the most you could lose would be

the £1000 already invested.

Any other assets owned by shareholders will not be subject to claims by the company’s

creditors (i.e. the people who are owed money by the company). This concept was brought in

by Governments in the mid-19th century to encourage people to invest money in business

companies. Before this was introduced huge risks of losing everything deterred most people

from buying shares as a way of investing in companies.

The company itself is however liable without limit for its own debts.

In the case of a company limited by guarantee, the shareholders’ liability is limited to the

amount they guaranteed to pay in the event of the company failing.

Most companies are registered with limited liability when they are being formed.

FRANCHISING

A contract under which a business allows another business the legal right to market

and sell its products in a specified area. So,

Kotler describes three forms of franchise organizations;

(1) Manufacturer- sponsored retailer e.g. Volvo licenses dealers to sell its cars.

(2) Manufacturer - sponsored wholesaler, e.g. soft-drink industry, a business operation

under which a manufacturer licenses bottlers who buy its syrup concentrate and then

carbonate, bottle, and sell it to retailers, e.g. Pepsi-Cola.

(3) Service-firm sponsored retailer e.g. Car hire - Avis, Hertz; Fast food some (but not

all) McDonalds’s, KFC, Holiday Inn.

The contract arrangements may vary depending on the kind of franchise operation. Many

businesspeople enter into a contract to make legal use of a well-known business name. In

return the franchisee pays fees, commission, or a single price. In addition, the franchisor

may provide start-up advice, marketing materials and corporate image materials (the look

and feel of an outlet) and help in other ways to launch the franchise operation.

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