HIDAYATULLAH NATIONAL LAW UNIVERSITY RAIPUR (C.C.) READING MATERIAL COMPANY LAW SEMESTER - VI COURSE TEACHER: Dr. Yugal KishoreIntroduction and Corporate Personality Lil "Phe seope of the law 1.2 Corporate personality 1.3 Lifting the veil of incorporation by the courts 14 Companies and criminal/eivil responsibility 1.3 Stautory lifting of the veil of incorporation 1.6 Types of company 1.1 The scope of the law There are many different ways in which persans may associate for purposes of business, ‘The more important ones are referred 10 below. ‘This textbook deals with one, important type, the registered company with liability limited by shares. [ts immediate history has been comparatively short, not much more than a century or so, but those have been busy years, and the story is by non Mueh of modern company law is to be found in judici enormous volume of statutory rules. ‘The leading eases should be read and eans finished decisions, despite the thoroughly understood, and the arguments for and against difficult points should be rehearsed earefitlly. Company law is very much a ease law subject he cases are complemented by a number pf statutes, which contain amass of detailed rules, The student should read through the sections to. which he is referred his does not mean that he needs to know all the details by rote — very often a short statement encompasses the salient features. But it is working of the Acts as it is to grasp the reasoning of the judges In 1985 statute law on companies was consolidated in the Companies Aet 1985, which is the principal statute. Th was supplemented by the Business Names Act 1983 which deal with special < important to grasp the and by the Company Securities (Insider Dealing) Act 198: tpies relating to companies. The latter Act has singe been repealed by Pt Y of the ‘minal Justice Act 1993 In 1983 there was ao a major reform of the law on corporate as well as2 Introduction and Corporate Personality individual insolvency, The Insolvency Act 1986 which consolidates the law in this ficld includes the whole statutory code on company receivership and liquidation, which had previously been found in the later part of the Companies Act 1985. In the course of these consolidation measures of 1986 the statute law: on disqualification of directors and other company officers was separately re-enacted in the Company Directors Disqualification Act 1986. There are also a evnsiderable number of regulations made by statutory these are the Companies (Fables A to F) Regukutions 1983, which inclade the latest statutory model set of articles (Table A} tor companies limited by shares, ancl dhe Insolvency Rules 1986 which contain the procedural details of company liguiehation ‘The Financial Services Act 1986 repeals Pt HL of the Companies Act 1985 on company prospectuses and replaces it with a new system applicable to listed and unlisted securities, In particular the information to be given by way of “listi particulars’ is preseribed by Stock Exehange regulations, published in what is colloquially known as “The Yellow Book’ The Companies Act 1989 received Royal Assent on 16 November 1989 but its provisions are being brought into effect by stages. Commencement dates, specitied actual and estimated, have been inswument, Amon and estimated, and the dates of regulations, summarised by the Department of Trade and Industry (as at 3 May 1994). Much of the 1989 Act is in the form of revised scetions incorporated into CA 1985 ‘These are cited below as sections of the 1985 Act. For example, s108 of the Companies Act 1989 substitutes. new 935 into the Companies Act 1985 on ultra vires Sxtralegal rules and sanctions may be as important in practice as legal rules, emanating for example from the Stock Exchange and the City Code on ‘Takeoveis and Mergers, A good illustration of this occured in Re Chez Nico (Restaurants) Ltd [1991] BCC 736. In Re Chez Neo, although the City Code does not have the foree of hw, Sir Nicolas Brown Wilkinson V-C held that a substantial failure to eomply with the Code was an important factor for the court 19 the into agcount when jon under S430 CA 183, and refused to considering whether to exercise its diser allow a minority 10 per cent shareholder co be compulsorily, bought our by an offeror of the company’s shares pursuant to 3429 CA 1985, However, this textbook is in general restricted to those rules that are legally binding, R In recent years, although a great deal of noise hay been ade about company ha refarm, successive governments have done very Tittle and the initiative has been taken by th indications that this situation may be set to change as the impetus towards reform seems to have been seized by governmental and quasi-governmental bodies ont private sector in the form of codes of best practice. ‘There are Most important of the recent government publications must be the consultation paper, Madern Company Lam for @ Competitive Economy, which issued from the4 Introduction and Corporate Personality nineteenth century canal and later railwa 1 Act of Parliament, partly because they could thereby be given sututory power to acquire red under the Companies Acts companies were formed by sp land ete, which would not be given to companies fi Since a company’ is a separate legal entity it has rights and obligations of its own Company property belongs to the company. It may employ people to work in its business, enter into contracts and incur debts. The members of a company, own and control it but they are not parties to its legal transactions mor are they of the company Although » company is trea limits to treating a company in this way and the terms of a contract may neg a construction. A good illusteation. is the cave of Deuische Genussensshafishink v Burshape & Others (1995] 1 WLR 1580. Here the bank's insurance policy covered Sburglary, robbery or hold-up’, or ‘thei ... committed by persons present on the premises of the assured ,..". The House of Lords held that the policy only covered theft by a natural person who was physically prevent on the bank's premises. The bank was therefore unable to claim under the policy when a company committed the theft through its chairman who did not physically enter the bank, ‘The definition of ‘person’ contained in s6l of the Law of Property Act 1925 inchides a corporation Unless the context provides otherwise. Their Lordships fele that the context did provide otherwise, as the clause ‘referring 10 burglary, robbery or hold-up, ean only relate to crimes committed by natural persons on the bank's premises’ agents ied as a legal person upon incorporation, there are jalomon's case ‘The distinction between a company and its members is called the ‘yell incorporation’. ‘The expression is not really approps the identity of the members of a compan} is pot veiled from public view but is aseertuinable from a register of members which is open to public inspection. However, itis well understood in its common usage “The principle of the veil of incorporation was tested and finally established by the decision of the House of Lords in Salamon ¥ Salomnn & Co [1897] AC 22. In the study of company law it is essential to understand the essential fyets and issues of this case, which is the most fundamental decision of the courts in this field, Many subsidiary rules S had for many years carried on a successful business as a leather merchant and whokestle boot manufieturer. He decided to reorginise his binsiness by: transferring it to a new company which he formed for the purpose. At that time company law required every company to have a minimum of seven members. So S took ene share hier to have one share as his nominees, In this way he became the sole beneficial owner of the company S sold his business to the company at a rather optimistic price but this did not matter since he was the sole owner of the company. ‘The price was satisfied partly by the allotment to $ of 20,000 £1 shares issued as fully paid and partly by the issue re derived from it and arranged for his wife, four sons and adain this tidation, 985. In ification ompany tatutory s 1985 npanies reedural ted and “listing what is but its pecified © been A 1985, panies 1 rules, Keavers ns) bad 1e force comply L when used t¢ hy an -xtbaok ny law » been re are veforin ation om the Corporate personality 3 Department of Trade and Industry (DTI) in May 1998, The DTT regards the current company law framework ay obsolete and proposes nothing less than a review of the entire core of company law, resulting in a more modern, efficient and cost effective system. On 30 November 2000 the stecring group of the Company’ Law Review issued a third major consultative document entitled Modern Company Law for a Competitive Ecommmy ~ Completing the Structure, 10 which responses were invited. ‘This consultative document is now a closed consultation and is awaiting a response from the government, as are the dacuments on trading disclosures. and registration of company charges. ‘The steering group is expected to present a final report to ministers around the time of writing, but the recent general election in June 2001 may have delayed the timetable by several months More specific, and less ambitious, was the joint Law Commissio directors’ duties, which has been absorbed into the D'VL initiative. ‘The Hempel Report on corporate governance has resulted in a new code of best practice issued by the Stock Exchange, currently approved by the DTI as the best method far this Kind of reform. On the other hand, the Financial Services and Markets Bill aims to bring greater statutory regulation into the field of financial services and. has implications for the flotation of public companies and offers of company: shares to the public. Each of these is referred to in greater detail where selevant in the text In December 2000 the EL’s Council of Mis ached polit the regulations required to establish a European Company Statute for the creation of a European company ~ *Societas Europea’. If these regulutions are adopted by: the Europ force in 2004. However, in order for the Societas Europea to become a reality, the 5ch Directive on Worker Participation will need to be implemented. S report on sters agreement on in Partiament the statute will come in 1.2 Corporate personality Separate legal personality In this textbook the word ‘conipa registration under the Companies Act 1983 or an earlier Companies Act A company is one (wpe of ‘corporate body" or ‘corporation’, which has the essential characteristic, in contrast to partnerships and other unincorporated fons such as clubs or societies, that it is a legal person oF entity distinet from its members. With minor exceptions company law does not apply to ang type of corporate body other than companies. It is worth noting, however, that corporate bodies may also be formed by royal charter or by special Act of Parliament, In this cuegory are found many types of Corporate body, such as an eminent learned suciety or a local authority, which arc not ‘companies’ in any ordinary sense of the word, However, commercial enterprises may also be formed in this way though it is not common, For example, in the iy" és used to mean a company formed by assoc 9tal Act of 9 acquire aies Acts Fits own. ark in its lany own Ww agents there are, such, fisbank v covered won the sa covered wes, The rinted the nition of poration, atext did ‘ean only ‘veil of sof the © from a is well shed by C220In ad issues Id. Many ant and ferring it vany Tan ine share © as his id not al partly the issue Corporate pervonality 5 to him of a £10,000 debenture, which was secured by a charge on the company's property, ‘The company later lost valuable supply contracts and ran into financial difficulties. To could only have such rights as the debenture, when issued, had conferred on S. When the company failed its remai ts were worth less than £10,000 and it also had debts to unsccured trade creditors. ‘The question which arose wis whether the hokler of the debenture or the other ereditors had better claim to the assets, I the High Court and then in the Court of Appeal the decision went the debenturcholder. It was said that some prineiple of agency or of trust law should apply to identify S with the company. so that he could not, under the debenture, have the rights of a creditor against it ay his debtor. It was also argued that any company must have at least seven independent members with the result that the relatives of S could not be regarded as proper members, so that the company had not been validly meorporated, ‘The House of Lords overruled the conclusions of the lower courts on. these various points. Lord MacNaughton said sc money S sold his debenture to an outsider (I) but the later ing ass inst ‘The company is at law a different person aliagether (fom the subscribers ty the memorandum; and, though it may be that afer incorporation the business is precisely: the same as it Was before, amd the same persons are managers, and the same hands receive the profits, the company is not inv faw the agent of the subscribers oy trustees for them.” The effect of the veil of incorporation The principle established in Sulonun’s case has been applied in a variety of other situations Ownership of property. Wn Mucuura v Northen Assurance Co Led 1925] AG 619 M. had transferred to a company, of which he was sole owner Iying on MUS land, He insured the timber in his awn name. valuable timber then The timber was later nstances. M claimed under the insurance M lacked any ‘insurable interest” in the destroyed by fire in cather suspeet eine policy but it was held to be invalid sin timber. He no longer owned it and his undoubted interest in the company as shareholder did not suffice, Thi fully made by Lord Buckmaster point was for 'Now, ae shareholder bas any hhe has aw ht tu any tens oF property aiviied by the emipans. for wal ejuityble inverest herein, The decision in Macau represents a fairly narrow view for economically and factually M.was undoubtably interested in the timber. ‘The Macau principle has deen rejected in a number of other jurisdictions, notably Australia and Canada. 1 should also be noted that Milwr v Jones (1867) LR 2 Ex 139 is authority for the proposition that sharcholders do have a sufficient interest in the success or filure of a business venture of thescomipany to validate an insurance policy, taken out in their own names, to cover any resulting loss in the value of their shares Hmpluyment. I Lee v Lees Air Farming [1961] AC 12, 1. had been the sole6 Aneroduction and Corporate Personality owner of a company whose business was aerial crop spraying in New Zealand. L. managed the business and acted as chief pilot. He was killed in an air crash while working for the company. If the company was liable to L's widow, as his executor. for compensation it could recover the payment from the statutory workman's compensation fund. The New Zealand courts rejected the widow's claim but the Privy Couneil reversed their decision, holding that 1. could be and was an employee of the company with normal rights against it Landlord and tenant. There have been a number of cases in which the issue has been whether a member of a company, who is its sole owner, ean claim the rights of a landlord or of a tenant of property which is vested in the company in that capacity, If the member is an individual, such claims are usually unsuecessful. That was the result, for example, in Tunstall v Sceignayn [1962] 2 QB 393, where S as a member of § Ltd asserted a landlord's right, in priority over the tenant, to resume possession of the premises on the expiry of the lease, so. that S might use the premises for her own business. The claim fhiled since S had transferred the premises, to S Ltd and no longer qualified as landlord under the Landlord and Tenant Act 1954 However, section 1.3 gency cites eases where a group of companies is treated as a single entity even though one owns business premises as landlord and the other occupies them as tenant. Phis is not the issue which Fiduciary duties. ‘The fiduciary duty which a director owes to the company is not, in ordinary circumstances, owed to its members. The members, even where they exercise practical control over the directors whom they have appointed to office, owe no duty to the company: Multinational Gas and Petrochemical Cas Multinational Ges aud Peirackemacal Services Ltd {1983} Ch 258. The recognised exceptions to the principle of the veil of incorporation, ie where the company and its members or directors are identified as if they were the are considered in section 1.3, since they cover a wide ficld ‘ose in Steignann’s case Essential features of a company This is a pr ate described in greater detail elsewhere in the manual in the apprope Limited liability ‘The members of a company are never directly liable for its debts, since those are debts owed by the company. But members will be liable to contribute to the company's assets whatever is required to enable it to pay its debts unless: their liability is expressly restricted by a statement in the memorandum that ‘the ability of members is limited’, What this means is that the members lability for the company’s debts is limited to the amount which is unpaid on their shares. If the shares are fully “The company's liability for its debts is, ‘ary statement of 2 number of aspeets of company structure which te contest paid up then there will be no further liabilit Af course, unlimited. With the exception of one type of private company the fact of members’ limived liability is also disclosed by: the company’s name, which ends with(spite danenenes nfonds EU HayL JO 94S dy OL parr ae SiapjoysUeys OL UIT SIyRLE Suomi UEP (savys oy Xed on SHpQEyE Jo pur) Suxduumo® aq jo deyss9uMO Jo SHUM gue somEYS, AopLOKAMys, e Ospe SE aque e HSeds aweyy uy soueys AAU LO dU JO AppOY pasowsutas a1 Bulag, ys pauiquarod st daysioquuout (aaucrens Sq pantuay duecuoa © yo axes oy ut) grades aarys ou Sey Condiuar aye esapup, sBurppoypaey 19s Tp soueleye a s) Salutpjoyaueys: “OIA Faq. 01 OSE SE sNqtUDUL F ieyt optvaud Seas sop ayy, “Suosind ours oy oq 01 stoquoW paw stomanp OY! 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SUIpUEISMNo |S St HUN SUY pL SAUEYS ADL UO aNp UNOLUE aut Sueduios oyp or Sed or st Surdusos porta e fo suquanus yoo AyEgE Aq powuny Suedwoy r s0}) steMoHUEd jELONIPpE sey WNPULOWDUL dy ssqUP spore! aeuidosde ay ut soi] poure|xo st pue poussoues suosiad ays iq yneypp 20 Suepnaut suse uoroues & S[jusoua st sty y, “Susduios partury v jo sigap aya sparwor aingunues ca 9IqeH ouuoD|g ALE “SHOI99UP 4 ‘SiaqUIaLE YOR| UL sadurISWNDAD [eDOds a1 a1, “SOUEU atOY UE 919 ,panlUNL, puom ay2 Ade ION OP YoIyA ‘S19quLDUL Jo SuQey pormuyun quis satiediuos aq asmmoo jo aur axoq waa pap aa Sad aan, sng) prwon ah soya aay) tout st att samo 9u ¥ se pao +£61 BY sosituand « out ounsas on Ys go) wy ys ay x Jo syst = Soup ansst saxon ay ing s,uauyuox somnaax anya yses “T puryea:8 Aniroduetion and Corforate Personality “Phe articles define the shareholders’ entitlement (if'any) by virtue of their shares to receive dividends out of profits, return of capital and to vote at general meetings. Shares are personal property and, other than shares in uncertificated form, are transferable by the proper procedure but subject to any restrictions on transfer contained in the articles: S182 A change of membership does not affect the continuing existence of the company which in that respect is said to have ‘perpetual suc of the company were to die the company would, as a separate legal entity, continue to enist. ession’, Even if all the members Written constitution “he constitution of a company consists of two documents which must be in writing. ‘They are the memorandum andl the articles of association, ‘The memorandum is the company’s external constitution, in that it gives outsiders essential information about the company such as the name clause of the company, which is purposes of litigation, and the objects for whieh the company is formed, The articles ‘of association are the interoal constitution of the company, dealing with such matters, as the calling of meetings and the appointment of directors, ‘These documents are discussed at length later on in the book. important for the Capital The memorandum of a company defines its I). This fixes the masimem amount of share capital which it may issue IF it needs more it must inerease the Timit hy the correct procedure (see Chapter 6, section 6.3 Increase of share capital) , The total capital is divided into sha When shares are issued the company fixes an issue price. which may be the sime Cissue at par’) or more (issue at he less (tissue at a discount’), Voless the whale issue authorised capital” (unless it has no share capit ws of specified nominal (or *par’) value; 92 premiun®) than the nominal value, but may not © is paid at the time of issue, liability to pay the amount outstanding passes with ownership of the shares ‘The capital subscribed by members for their shares is retained by the company and may not be distributed ay dividend nor reiurned to members (unless. the company is: unlimited) exeopt under strict rules of procedure applied to protect the interests of creditors of limited companies who haye a frst call on its assets for payment of their debts. It also underlies the rules on profits distributable as dividends (see Chapter 6, section 6.5). his principle is Litigation : As a general principle (the rule in Fass » Marburtle) no one other than the company may Sue or he sued to enforce its rights or obligations. In those legal _proceedin: where knowledge is an issue, as it may often be in a criminal case, the knowledge of living persons who ave officers, employees or agents of the company may be attributed to it (see Chapter 2, sections 24 and 2.5)sir shares vwetings orm, are uansfe company members continue writing am is the on about t for the © articles, a matters, ents are (hab no) lay issute hapter 6. alue the same may nt rime ol hares. company less. the neiple is ea first n profs company recedlings sledge of may be Corporate personality 9 In the absence of exceptional circumstances, the Rules of the Supreme Court (sce: RSC O.5 r6(2) and 0.12 r1(2)) make it clear that a company cannot | except through legal advisors. In Radford » Samuel & Anor [1993] BCC 870, C was a sole director and 99 pe judge’s order that the company should aot be allowed to appear without legal representation, C wanted to appear an behalf of the company himself) He argued that the company did not have the means to instruct lawyers, that the company. had a gov! defence to the action, that by nor being heard che company: would lose the case by default, ahd that as a result of this his personal and business reputation would be damaged. “The Court of Appeal took the view that none of chese arguments amounted 10 cXceptional circumstances, Sir Thoams Bingham MR, as he then Was, explained the justification for the rule by emphasising that limited abilin in thar those who are owed money by the campany cannot look to the cent shareholder of the company who appealed against a is a privil assets of the directors and sharehoklers That is Part of the price is... that a corporation cannot act without A ht at a price {enormous benefit to a lintited company but it is a benefit bow al ach iors. Other types of business organisation Before considering the pros and cons of carrying on business through a company as a separate entity it may be useful to consider the alternatives: Sole trader An individual may carey on business, on his own as a sole trader, He will, subject 10 contractual restrictions, ineur unlimited personal liability for his acts and will be subject to tavation in a persoaal capacity. Modern business, on more than avery modest scale, will necessitate his setting up oF joining a farm of business association Partnership Partnership is the relation which subsisis between persony carving on a husiness in common with a view of profir (SE Partnership) et 1890). This telly uy Title, although the 1890 Vet excludes companies from the definition and s716 generally prohibits partnerships of more than 20 members, requiring thent to register ats company. Partnerships are suitable fiir small businesses invoking a rehtionship of mutual trust and confidence. ‘The partners are agents tov cach other, ‘Thus, they are normally jointly and severally liable for the acts of each ether and the Tiabiligs of cach partner to third partis és unlimited, although they are fiable 10 contribute to each other's lishility and entinted to ehiiny an indemnity from the partier at tilt Limited partnership A limited partnership may be registered under the Limited Partnership Net of 1907. The disadvantage of this type of business organisation is that nor all of the partners are allowed to have limited Hiability. Seetion 12) of the Net provides:10 Introduction and Corporate Personality A limited partnership shall not consist of more than twenty persons, and must consist of fone of more persons called general partners, who shall be Kable for all debts and obligations of the firm, and one oF more persons to be called limited partners, who shall at the time of entering into such partnership contribute thereto a sum oF sums as capital or Property valued at a stated amount, and who shall not be liable for the debts or obligations of the firm beyond the amount sa canteibuted.” Further drawbacks to a limited partnership are that the limited partner may not withdraw his contribution during the continuance of the partnership, and he is prohibited from taking part in the management of the partnership business or from binding the firm, See ss4(3) and (1), As with ordinary partnerships, a limited partnership docs not enjoy a separate legal personality. This was recently illustrated in Mephistopheles Debt Cullection Service (A Firm) v Lotay (1994) The Times 17 May. An individual was subject to a civil proceedings order under 42 of the Supreme Court Act 1981, under which he was judged to be a vexatious litigant. As such, he was prohibited from commencing civil proceedings without leave of the court, The individual then assigned his debt to & limited partnership which he had formed and commenced proceedings in the name of the firm. The Court of App Nourse LJ said that it was important to remember that the plaintifis were the three individual partners, Their entitlement, under the Rules of the Supreme Court to sue in the name of the firm, was procedural only. It does not confer corporate status on 2 partnership. His Lordship also held that it was not possible for the application to be made by two of the partners, without the third as well. “Phese disadvantages which flow from that they are comparatively rare, and the registration of a limited company is to be preferred. Some professions do not allow their members w carry on business through the medium of a limited company. Here, a limited partn 1 an ordinary partnership, might be used where one of the partners is not prepared to have full Liability, or where the other parmers do not want hiny to management. Once again, it must be stressed that such eircumstinees are rare, but it cand is kept on asa held that he was a ting in breach of the onder gistering as a limited partnership mean ship, as opposed ake part in its might cover the situation where a senior partner is consultant ‘The Limited Liability Parterships Act 2000 came into force on April 2001 to coincide with the start of the new tax year, The Act creates ‘a new legal entity’ with 8 separate existence from its members The internal organisation of the limited liability partnership (LLP) will remain ay @ partnership, but externally the entity. will resemble a company with limited liability. ‘The L1.P will bave to make similar financial disclosures to those that companies already have to make An order to form an LLP there will need to be at least tvo people who will be required to submit an incorporation document to Companies House. ‘The advantages of the LLP are first, and foremost, limited liability, Joint and several liability Which exists between partners of a regular partnership is different in the LLP, In an LLP the members contract ay agents of the partnership which 10 rr.i popredar ay on ‘Sorurduwos by ddd ou op YAN “SHY 9PeG JO SHEL dy toy papeayd ovey samneruatuuos SUe]\ BUEN one siosse aiuryD BuaLoy coaML Gay sw sy asnesAq [Roe SyoHs So SUyp, SRP 9yE Jo alqos oyp ose PHY spmeyp. ayp Furspoads pounbas ose St apnpaqps v pub GUSTY a}eS JO SME OYE UE posoiseiaa ag OL poow [8 SHY OPS Jo STEP 2g Jo suorstvond oa ay pines Ww EpMS Sy ERE PUES QUOI PMNOW AL SMEG Sl SUL “OS OP AML OP. Sar gauTeLT UL ang adaeyD SUMO owas OF Saiysiounied pur Gopent sos aap apyssod Star Cony [eb] LAS UL SruLYD FUNTTO|F EOF Hak yAN aa ySHp slosse aypL YL peap OF dauj S) durdiuos 9y,f, pear ur qaoas s Curduioy ayr st suey FauTOY w Jo H9kqQNE xp 94 UID YR|N Suodosd Jo oMAUMEXD poo | /pURL Se APHs Siossr pani] MRE axey] I0U Soop Cuedwey ayy suny. (AON GuvjMaeued Si pur age oy) UL payLasop Sipsse ayp Jo\G Stox04) aBARYS RUULOY] Y SINSSE SIE UO aRArya RUlaeoy] JO WLIO] ay UE XLLINdAs DM on panmuiod si ae sous yeyulis Urey asia op aoisea ye spay Suelo y uoneFapp Jo dat ay st Sih, OquHOW oF ajqraunodor. U,f, "PaINdas aq PV WOLD ERIE CLereysHES yeyy sUTAMASE OU aSINOD JOS) AY], gL aYRYOW vor ipog Fueuea sy IU] OF pu suaseULU jeuIssajord 1HDIAdOY Cope oY SIOUdOAd 40} ayqussod soy (Stopjoqueys) diysiouno wosy (stoop) iudtiameur jo uontardas ay.L, SOMTYS JOU[L YSU OF SaqlUDUE jo WOAp axtteppA dL PAE TARE paretUTy Jo oad) 94) 946 UEHIOCLUL ySOLL ay PaquEasap SpraiyE SueNEIDpSUDD a) TuOWY 7 “cuysiounied ¥ St 10 J9pen ayos v se apen oF Spiesouad ave saxueuaiye ayy, “Sus 1 Yop ysnosy uonesiumgie ue sr Curdimoy F Funvrodiosur jo soRemepe rueodun ayp jo awos poresipur e jo smMsuMPEIRYD aq! YO WoRDAS snOIasd OYJ, zyuo go ssoursng ¢ UO LL noynaodiony fo soBviunaposip pun sodviunapy siuppear sof suusoy ajqenins tow pac Loy.p, YL Es cu soy ssoursng wo sama Coys st gz od pom 9g IsnEN JqUINU aD pue padnuyUN st sioquis jo VaEGeH axp Ng CFL 1 [e96t | 4iymacuonauaney ysigeegy ayy fo soyseececy fo aouniassy 8 saat Moot O¥ [961] ha) SuPRISMAY § dosage 998) JOS WL Lip pHa] e Se poswuForar oq Ge YTS “uonemesse portiod.oouiun uP jo SBqUOUE se rUIguOD UED sjenpENpUL jo dnodd Y uapmposse parriodinauru, dlyysinquiour Suy8ueyo ¥ audsap soumisixa Jo Smut Solu pure Xusadosd pyoy “sien oruL sodA oy Age ayp ‘xjpuieu ‘Suvdiios poyesodionur yr soy st tues ayn oie soFeITEAPe Ly] “MOL UE SOUP Jo} uqeH] [ENby suuNsse Yu SHouEd sayy ayy IU pur diysiounsed stp ouoyosoy 1 ap aoquiow ay Jo peowsuy q*T'T 942 yt SupoenUos dq [ibs Suutd pap aya sauuope [eB] ayesvdas sey q’[] ay asnengy “yuoWaSUELE sty2 uo Sr or papaus oq [Ls ATT ue ys Suyeop Curd pryy ue wy sues i Aypoursied oyosnduey yoy uty uatay pur qui Oy LW snypuass yes nw pouty, apn ua or 102 | Wing "aN su pol posoddo ssouisng, 3q 01 st uaa diy He Lt ‘oad oy uoneay uo snaras, ans 01 Lr saayh oy Jap40 dy kU Ou on igpp st Aupuauuy oy epnps won Dag mona) arereila woy a0 si oy pu you scur 4o jean ve megs pur sie Jo osis,12 Intruduction and Corporate Personatity One of the main drawbacks of a company as a business organisation is that it is strictly regulated by law. For example, it is required to produce annual accounts in a set form and to have them audited (see Chapter 4, section 14.1), For this reason the routine administration of a company is often more cumbersome and expensive than that of a partnership. ‘The other feature of a company which is usually reckoned to be a disadvant that it must disclose, eg through its aecounts and its annual recurnya great deal of information; which other businesses may keep in confidence. ‘The publi¢ has the right to inspect company documents at the Companies Registey and at the registered uffice of a company (sce Chapter 3, section 3.2). ‘The basis of taxation of companies, 3 quite different from that applicable to partners or th sate traders, ‘The cay burden is therefore ofien one of the deciding f Sometimes there is effectively no choice, In many professions it is pot permissible ta carry on the practice through a company and so there is no alternative to a partnership (or a one-man practice). In recognition of this fact profession: firms are exempt from the general rule which prohibits partnerships or more than 20 partners: s716. whe abave point als) incidentally: indicates that if api be raised from a considerable number of persons it is hardly possible to-do atherwise than form a company. In theory it is possible for capital 10 be provided asa loan, But there os a risk thar the lenders will he found to have constituted themselves partners. Moreover, it iy much more difficult 1 keep track of what oes on in at large partnership. As already. stared 20 is the legal maximum number sional business. Above that limic it must be a wis cl uf shareholders on company dividends, is cturs, al for a business is to of partners permitted in a non-prok company For the smatl enterprise. in which there really may be a choive of ype of organisation, the protection of limited liability *separare Tegal personality,’ and the impact of tay are usually the deciding faetors in making the choice. 1.3 Lifting the veil of incorporation by the courts dntroduetion Notwithstanding the principle of Salomon, there are certain situations where the ‘courts have shawn themselves willing 0 ‘HA the veil of incorporation’ and set aside the separate legal personality of the company, ‘There is no. single guiding principle which the courts apply as a basis for their decisions, and it is very difficult: to predict with any certainty just when the courts. will mn. Most writers approach the subject by identifying broad headings under which judicial intervention to lift the corporate veil has eccured. Phe main headings are set_out below, but it might be thought thar a general fh the veil of ineorpora M23 that it is ounts in a his reason) eapensive at deal of idends, is burden is it iy not tlhernative fessional vw than 20 ‘le to do provided mestituted of wha y number aust he a Faype of “and the here the Set aside principle Micult oration v whieh Lifting the veil of incorporation by te courts a criteria for lifting the veil, namely, when it is in the interest of justice to do. so, ought be the main criteria, ‘The current view of the Court of Appeal was stated by Shde LJ in dems y Cape Industries ple [1990] BCC 786. In the stdams vase the Court of Appeal was asked, inter alia, to lift che veil berveen a gr and treat them as a single economic unit, To this Slade LJ said: 4p oF companies ‘Neither in this ebiss of ease nor im any other cbse af Gase WIL open wo this court te disregard the principe of Suhonen ¥.Sedomen merely because it cunsiders 4 just so tod Despite this Richard Southwell QC in Creasey v Beachnwod Motors Lad (1992) BCC 638 at O40, said “Phe poser of the gouet tn Hit the eorpwmite sei] evists, The problem fue a judge uf Best instance is ti decide whether the particular cxse etore the Grunt is one in wshich that power shiuld be exercised, recognising thar this is a strom power wiht fea fc everenel te achieve pistice where its excrene is nevesstry for that purpose, but whieh, misused would be likely co Giuse nor invonsiderable injustice” (emphasis aude) This particular issue does not seem to have been finally settled, but it és submitted that the Court of Appeal’s view is 10 be preferred, The main heads, under which judicial intervention to Jilt the corporate veil has occurred, are set gut below, Students should note that there is a wealth of literature on lifting the veil. See further CM. Schmitthoft, ‘Salomon in the Shadow’ | 1976] JBL. 305, and $ Ocolenghi, ‘Prom peeping behind the corporate veil, to ignoring i completely” (1990) 33 MLR 338. Section 1.3 summarises the important statutory exceptions 10 the yell of incorporation Company identity used to evade obligations ate identity: of a company The court vill intervene 16 prevent the misuse of the se fo enable members to evade lexal or contracttutl obligations or restrictions binding on them personally In Re Bugle Pros Lid 101] Ch 270 a shareholder objected to the compulsory acquisition of his shares following a taheover bid under ss!28 430. Under these provisions, which are fully explained later (see Chapter 12, section 12.4). if Company A made an offer for the shares of Company Band within four months sccared acceptances trom holders Of at least 90 per cent of the shares af Company B, Company \ way enti which no acceptance af the offer had heen reeeived, Inv this particular ease Nand who held 90 per cent of the shard of Nugle P the 10 per cent sharcholdine of % in the same ¢ the ambit of S428 N and Y formed another company, of which they were sole shareholders, and caused that company to make an olfér for the shares of Bugle Press Lid, Neand Y accepied the offer in respect of their shares, the the necessary M) per cent acceptance, and their company invoked $428 ty sequire the 10 per cent shareholding of ZZ, however, applied to the court ta sel aside the notice al jw acquire compulsorily on the same terms the shares for ness Lid wished 1 acquire compulsorily pany: Vo bring their plan within 34 Company Law defendant company. Whether oF not this is, desirable, the right to use a corporate struc- ture in this manner is inherent in our corpo- rate law. Mr Morison urged on us that the purpose of the operation was in subsiance that Cape would have the practical benefit of the group's asbestos trade in the United States of America witht the risks of tor- tious liability, This may be so. However, in cour judgment, CapeAvas in law entitled to Organise the group affirsin that manner to expect fe ‘court would apply the principle of Salofion v A Salomon & Co Lid [1897] AC 2 ip the ordinary way.” His Lordship concluded by rejecting the cor porate veil point. Comment This decision is the most comprehensive yet on lifting the veil of incorporation. The case takes up 70 odd pages in the law reports and was justifiably described by Gower, Principles of Modern Company Law (6th ed, 1997) at p166 as a “mammoth judgment’ in which the Court of Appeal ‘subjected lifting the veil to the most exhaustive treatment that it has yet received in the English (or Scottish courts).’ The following broad points can be extracted from this importaat ruling: 1, Save in cases which turn on the wording of particular statutes or contracts, there is 10 justification for lifting the veil in the inter- ests of justice. 2. There is no general principle that all com panies in a group will be treated as one. Indeed the contrary is true. 3. There is no presumption of an agency rela- tionship between a parent and subsidiary company. Whether or not there is an agency relationship is a question of fact, and in the absence of an express agre2- meat it will be very difficult to establish such a relationship. * 4. A company is entitled to organise the affairs of tts group in such a way that the business carried on in a particular foreign country belongs to its subsidiary and not itself. In this way a company can ensure that any future legal liability falls on another member of the group rather than on itself. Regardless of its desirability, this is an inherent feature in English company law. 5. tis appropriate to pierce the veil where special circumstances exist indicating that there is a farade concealing the (rue facts, and, in deciding this, the motive of the per- petrator may be highly material. In identi- fying what amounts to a fagade, the court gained assistance from the case of Jones ¥ Lipman [1962] | All ER 442 (below), Despite the comprehensive nature of this judg- ‘ment the exact circumstances when the court ‘will lift the corporate veil remain unclear. The ‘case does however signal a return to the strict application of the Salomon principle. Bugle Press Ltd, Re [1961] Ch 270 See Chapter 12. Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Lid [1916] 2 AC 307 House of Lords (Earl of Halsbury, Viscount Mersey, Lords Kinnear, Atkinson, Shaw of Dunfermline, Parker of Waddington, Sumner and Parmoor) * Company registered in England had an ‘enemy character Facts Continental sued Daimler for the price of goods delivered but not paid for. Continental was registered in England, but all of its diree tors, and all but one of the shareholders, were German nationals and resided in Germany The company secretary helé one share and. although he too was born in Germany, he resided in England and in 1910 became a nat- uralised Englishman, Daimler argued that © allow Continental to sue in the English courts ‘would amount to trading with the enemy con 14on his ay re 1a cts ti art cy & an he ict mn _ | trary to the Trading with the Enemy Act 1914, as we were at!wag with Germany at the time the action was chmmenced. The Court of Appeal upheld a decision to grant Continental summary judgment, Continental appealed 10 the House of Lords. Held ‘The appeal was successful and the action was struck out. The company secretary lacked authority to commence the action and Continental had acquired an enemy character. This was determined by looking behind the veil of incorporation to discover the niational- ity of its controllers. Lord Parker of Waddington: “T think the law on the subject may be sum- rmarised in the following propositions: (1) A company incorporated in the United Kingdom is a legal entity, a creation of law with the status and capacity which the Law confers. Its not a natural person with mind or conscience, To use the languaze of Buckley LJ, “itcan be neither loyal nord loyal. Itcan be neither friend nor enemy. (2) Such a company can only act through agents properly authorised, and so long 2s, it is carrying on business in this country through agents so authorised and cesiding this or a friendly couniry itis prims facie to be regarded as a friend, and all His Majesty's lieges may deal with it as such 3)Such a company may, however, assume an enemy ehsraces This will be the case if its agents or the persons in de facto Control ofits affairs, whether authorised or not, are resident in an enemy country. oF, wherever resident, are adhering to the enemy or taking instructions from ar acting under the contro! of enemies, A person Knowingly dealing with the company in such a case is trading with the enemy. (4) The character of individual sharehold- cers canno! itself affect the character of the ‘company. This is admittedly so in times of peace, during which every sharcholder is at Tiberty to exereise and enjoy such rights as are by law incident to his status ay share- holder. {t would be anomalous if were not | | sok | | | | | | Comorate Pelsoatidy abd he fil Bf Idcorporation 5 so also in the time of war, during which all such rights and privileges are in abeyance. ‘The enemy character of individual share- holders and their conduct may, however, be very matcrial on the question whether the company’s agents, or the persons in de facto control ofits affairs, are in fact adhering to. taking instructions from, or acting under the control of enemies, This miateriality will vary with the number of shareholders who are enemies and the value of their holdings. ‘The fact, if it be the Fact, that after eliminat- ing the enemy shareholders the number of sharchalders remaining is insufficient for the purpose of holding mectings of the company or appointing directors or other officers may well raise a presumption inthis respect. For example, in the present case, even if the secretary had been fully autho- rised to manage the affairs of the company and to institute legal proceedings on its behalf, the fact that he held one share only out of 25,000 shares, and was the only shareholder who was not an enemy, might well throw on the company cnus of proving that he was not acting under the control of. taking his instructions from, or adbering 10 the King’s enemies in such manner a5 10 impose an enemy character on the company itself Iris an a fortiori case when the secre~ tary is without authority and necessarily depends for the validity ofall he does on the subsequent ratification of enemy sharehold- ers The circumstances of the present case were, therefore such as 10 require close investigation and preclude the propriety of siving leave to sign judgment under Onder XIV. (5) Ina similar way a company registered in the United Kingdom, but carrying on business in # neutral country through agents properly authorised and resident here or in the neutral country. is prima facie to be regarded asa friend, but may. through its sents or persons in de factor control of iis affairs, assume an enemy character. (6) A company registered in the United Kingdom but carrying on business in an enemy country is 1 be regarded as an enemy.” 1SComment | i | Lifting the vale lente the ehemly ce acter of a company is an established but. 6 Conpahy thankfully, rare occurrence, limited, as itis,| to times of war. The case was heard by eight law lords, illustrating the importance of the decision at that time the case was decided. DHN Food Distributors v London Borough of Tower Hamlets {1976} | WLR 852 Court of Appeal (Lord Denning MR, Goff and Shaw L1J) + A group of companies was treated as one single economic unit Facts DHN was a parent company which ran @ ‘cash and carry’ grocery business from a warehouse, ‘owned by one of its wholly owned sub- sidiaries called Bronze Investments Ltd, Another subsidiary owned the vehicles. The directors were the same in each of the three ‘companies. Tower Hamlets served a compul sory purchase order on the warehouse, which they wished (o demolish so that the site could he used to build houses on it. Compensation was available under statute both for the value Gf the land and for disturbance of the business. ‘Tower Hamlets was prepared to pay Bronze Investments £360,000 for the land but refused. to pay anything for disturbance of business. Tower Hamlets argued that Bronze Invest- ments merely owned the land and had no busi- ness to disturb. DHN argued that the corporate veil should be lifted and the three companies treated as one, allowing DHN to claim the compensation. Held ‘The veil was lifted so that DHN and the two subsidiaries were treated as one economic eniity, allowing DHN to claim the compensa tion, Lord Deaning MR: © We all know that in many respects 2 group of companies are treated together for the ! | jpposd of fengal dob plane cht and profitafd Idss ateos ey are frealed. as one doncfrn. Gaver in oder | Compalty Law, Brd 411969) p2l6 says: . therelis evidence of a general ten- dency to ipniore the separate legal entities of variong companies within a group, and to look instead at the economic entity of the whole group. ‘This is especially the case when a parent company owns all the shares of the sub- sidiaties so much so that it can control every movement of the subsidiaries. These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says. A striking instance is the decision of the House of Lords in Harold Holdsworth & Co (Wakefield) Lid v Caddies [1955] 1 WLR 352, So here. This group is virally the same as a partnership in which all the three companies are pat. ners. They should not be treated separately $0 a8 to be defeated on a technical point ‘They should rot be deprived of the compen sation which should justly be payable for disturbance. The thrée companies should, for present purposes, be treated as one, and the parent company DHN should be treated a that one. So DHIN are entitled to claim compensation accordingly Goff LI: this is @ ease in which one is entitled to ook at the realities of the situation and to pierce the corporate veil. Twish to safeguard myself by saying that so far as this ground is: concerned, Tam relying on the fxcts of this particular case. I would not at this juncture accept that in every case where one has a {group of companies one is entitled to pier ihe veil, bur in this case the two subsidiaries were both wholly owned: further they had rng separate business operations whatsoever thirdly, in my judgment, the nature of the question involved is highly. relevant namely, whether the owners of this business have been disturbed in their possession and enjoyment of it” |’ on serasami ! Comment 1. Shortly afterwards the correctness of the decision in DEN was doubted by the House of Lords in the Scottish case of Woolfion v Strathelyde Regional Council 1978 SLT 159 in which Lord Keith of Kinkel said: “Thave some doubis whether in this respect the Court of Appeal properly applied the principle that itis appro. priate to pierce the corporate veil only where special circumstances exis indicating that it isa mere Facade con. cealing the true facts.” However, the House of Lords did not overrule DHIN and was also able to distin- guish it on the facts of the case. DHN considered by some commentators to rep- esent the high watermark of judicial lifting of the veil, and this is evidenced by recent case law which has merked a return to the strict application of the Salomon principle. In Adams v Cape Industries ple (above), for example, the Court of Appeal stated that there is no general principle that all companies in a group of companies are to be regarded as one. In DH, Goff LJ made it clear that he based his decision on the particular facts and this is probably the best way to view case. FG (Films) Ltd, Re [1953] 1 AUER 615 Chancery Division (Vaisey J) + A film-making company was an agent of its American finance provider Facts ‘The applicants, FG (Films) Ltd, claimed to be the makers of a British film. If they succeeded they would obtain generous tax concessions but the Board of Trade [now the Department of Trade and Industry] rejected their applica tion, A declaration was sought from the court. Held FG Films Ltd were not the makers of the film i Corporate Personali ! be pad andl Veil y orp ion a§ they were merely the agent of an American company which jprovided the finance and staff. The film was not a British film. Vaisey J: “The applicants have a capital of £106, divided into one hundred shares of £1 cach, ninety of which were held by the said Mr Forrest Judd and the remaining ten by the said Mr Davis. The third director has no shareholding, T now understand that they have no place of business apart fom their registered office, and they did not employ ay staff. Ie seems to me 10 be contrary, not only to all sense and reason, but to the proved and admitted facts ofthe case, to say orto believe that this insignificant company Uundertook in any real sense of that word the arrangements for the making of this film. | think that its participation in any such undertaking was so small asio be practically negligible, and that it acted, in so far as it acted in all the matter, merely as the nominee of and agent for an American company called Film Group Incorporated. which seems (among other things) to have financed the making ofthe film wo the extent of a least £80,000 under the auspices and direction of the same Mr Judd, who hap. pened to be its president. The suggestion that this American company and Mr Judd were merely agents for the applicants is. to my mind, inconsistent with and contradicted by the evidence, and a mere travesty of the facts as | understand and hold them to be The applicants’ intervention in the matter was purely colourable. They were brought into existence for the sole purpose of being put forward as having undertaken the very claborate arrangements nevessary for the making of this film and of enabling it thereby to qualify as 2 British film, The attempt has failed, and the respondents decision not to register “Monsoon” as a British film was. in my judgment, plainly right? Comment ‘Treating one company as the agent of another oes not ignore the veil of incorporation butrepognises itas a se son. The real diffichlty ist ascertain jhen the ca} will fiad ah agency relationship. The mere fact that a Lompany is wholly owned of costrol es will not in itself suffice to make it an agent of another. FG Films is an exceptional case and the court appears to have been influenced by the fact that the company was under-capi- talised with just £100 share capital. However, in some industries this is the norm. In Atlas Maritime Co SA v Avalon Maritime Ltd [1991] 4 All ER 769, Staughton LI observed at p779e: “The creation or purchase of a subsidiary company with minimal lisbility, which will operate with the parent's funds ané on the parent's directions but not expose the parent to liability, may not seem to some the most honest way of trading. But it is extremely ‘common in the international shipping indus- try, and perhaps elsewhere. To hold that it creates an agency relationship between the subsidiary and the parent would be revolu- tionary doctrine. In Smith, Stone & Knight v Birmingham Corporation [1939] 4 AIL ER 116 Atkinson J implied an agency on the basis of control by the parent company but this approach now appears to have been discredited (see below). H and Others (Restraint Order: Realisable Property), Re [1996] 2 All ER 391 Court of Appeal (Civil Division) (Rose and Aldous LH, Sir fain Glidewell) + The veil was lijted where two compa- nies were used as a cloak for fraudulent and criminal activity Facts “Three defendants were charged with evading excise duty in excess of £100 million. They owned and controlled two companies but these companies were not charged with any offence. The court ordered @ receiver to be appointed to realise the assets of the defen- || Iq hnsland tne order also gave the receiver the power to realise the assets of the two compa- nies. The defendants appealed against this aspect of the order and argued that the court had no power to appoint a receiver over company assets where the company itself was ‘not charged. Held ‘The appealed failed. The defendants con- trolled the companies and used them as a fagade for the criminal setivity of evading excise duty. There was also evidence that they had benefited from substantial amounts of company cash, and it was therefore appropri- ate to lift the veil of incorporation to treat the assets of the companies as being realisable property held for the defendants Rose LI: “turn to the corporate veil. This involves (wo questions: first, whether inlaw iis per- missile to pierce or lift the veil; secondly, whether, on the evidence before the cour, this should be done in the present case. ‘As to the law, the general principle remains that which way enunciated in Salomon v Salomon & Co [1897] AC 22, [1895-9] AI ER Rep 33, namely that a company duly formed and registered is a separate legal enity and must be ueated like any other independent person with its own rights and liabilities distinct from those of ity sharcholders. But a succession of cases throughout the twentieth century show, as Danckwerts LJ said in Merchandise Transport Lid v_ British Transport Commission, Arnold Transport (Rochester) Lid v British Transport Conmassion {1951} 3 AILER 495 at 518, [1962] 2 OB 173 at 206-207: where the character ofa company, ot the nature of the persons who control it, isa relevant festure the court will g9 behind the mere status of the company as legal entity, and will consider who are thé persons as shareholders or even as agents who direct and conteol the zctivi- ties of a company which is incapable of doing anything without human assis- tance.”pa his art ver vas ia ng vey of he se Corporate Personality and the Veil of Incorporation 9 InAdams v Cape Indastries ple (1991) 1 All ER 929 at 1024, [1990] Ch 433 at 542 Slade LJ, giving the judgment of the Court of Appeal (of which Mustill and Ralph Gibson LJ were the other members) cited this passage and added: “The correctness of this statement has not been disputed.” The court also assumed to be correct the proposition that - “the court will lift the corporate veil where a defendant by the device of @ cor- porate structure atiempts to evade (i) lim- itations imposed on his conduct by law "(see [1991] I All ER 929 at 1026, [1990] Ch 433 at 544), Clearly, as a matter of law, the corporate veil can be lifted in appropriate circum stances As (0 the evidence, it provides a prima facie case that the defendants control these companies: that the companies have been used for fraud, in particular the evasion of excise duty on a large scale; that the defen- dants regard the companies as carrying on @ family business, and thet company cash has benefited the defendants in substantial amounts. It is, I think, conceded by the defendants and the intervenor (and, if not conceded, the contrary is unarguable) that if the companies had been about to be charged with criminal offences, Popplewell J could have appointed a receiver of the companies’ realisable property; and, indeed, all the companies’ shareholders were repre- sented before Popplewell J, In my judgment, the Customs and Excise are not to be eriti- cised for not charging the companies, The more complex commercial sctivities become, the more vital it is for prosecuting authorities tobe selective in whom and what they charge. so that issues can be presented in as clear and short a form as possible. In the present case, it seems to me that no useful purpose would have been served by introducing Tito criminal proceedings the additional complexities as to the corporate mind end will which charging the compa nies would have involved. Conversely, there could have been justified criticism had the companies been charged merely as.a device for obiaining order under the Act in relation to their assets. Inall the circumstances, Iam entirely sat. isfied that it is appropriate to lift the corpo- rate veil in this case and to teat the stock in the companies’ warehouses and the motor vehicles as property held by the defendants.” Comment This is a modern decision on lifting the veil where the company was being used for @ fraudulent purpose. Had the companies been charged the receiver would have had the power to sell the companies” assets, but Rose LI specifically made clear that the ‘Commissioners for Customs and Excise were ised for this. To have charged complexities relating to the corporate mind and will, such as identifying those within each company of whom it could be said represented the directing mind and will, These complexi- ties are explored in some of the cases in Chapter 2. Jones v Lipman (1962 | All ER 442 High Court (Russell J) * The veil was lifted where the company was a sham Facts The defendant had contracted to sell his house to the plaintiff and, having changed his mind he tried to avoid completion by conveying the house to a company that he owned and con- trolled. The plaintiff sought specific perfor- mance against either the defendant or the ‘company Held Specific performance was ordered against both of them. Russell J: “For the plaintiffs the orgument was twofold, First: that specific performance would be ordered against a party to a con-fi + act whovhas it ém his power to comipel another person to}convey. the property i question; and that admitedly the first defen- dant has this:power over the defendant company. Second: that specific performance would also, in circumstances such as the present, be ordered agains the defendant company. For the first propesition reference was made to Ellion v Pierson [1948] | All ER 939, In that ease resistance to specific performance at the suite of 2 vendor was grounded on the fact that the property was vested in a limited company and ot in the vendor. The company, however, was wholly owned and controtied by the vendor, whe could compel it to transfer the property, and ‘on this ground the defence to the claim for specific performance Failed. Itseems to me, ‘Rot only from dicia of the learned judge but so on principle, that it necessarily follows that specific performance cannot be resisted bya vendor who, by his absolute ownership and control of a limited company in which the property is vested, is in a position to cause the contract be completed For the second proposition reference was made 10 Gilford Motor Co Ltd v Horne [1933] Ch 935. In that case the individval defendant had entered into covenants restricting his trading activities. It caused the defendant company in that case to be formed. This company was under his control and did things which. if they had teen done by him, would have been a breach of the covenants. An injunction was granted notonly against him but also against the company. In that case Lord Hanworth MR, after referring to Smith y Hancock (1894) 2.Ch 377, sac “Lindley Li, indicated the rule which ‘cughi to be followed by the court: "IC the evidence admitted of the conclusion that ‘what wal being done was a mere cloak or sham, and that in truth the business was being cartied on by the wife and Kerr for the defendant, or by the defendant through his wife for Kerr, | certainiy should not hesitate to draw that conch sion, and to grant the plaintiff elie? accordingly.” Ido draw that conelusion, 1 do hold that the company was “a mere ol abd | 14] 4 hdd 1 ‘lop OF stim’; 1 do hote that it was ¢ 1 mefe device for enabling Mr E B Home. to tontinueito commit breaches of [the covenant}, and in those circumstances the In Must go against both defen: Lawrence LJ, in his judgment, said: agree with the finding by the learned judge tht the defendant company was & mere channel used by the defendant Horne for the purpose of enabling him, for his own benefit, to obtain the advan- lage of the customers of the plaintft company, and that therefore the defendant company ought to be restrained as well as the defendant Horne.” Similarly, Romer LI, said “In my opinion, Farwell J, was perfectly right in the conclusion to which he came that this defendant company was formed and was cerryiag on business merely as a cloak or sham for the purpose of enabling the defendant Horne to ‘commit the breach of the covenant that he ‘entered into deliberately with the plain: tiffs on the occasion of and as considera tion for his employment as managing director. For this reason, in addition to the reasons given by my Lords, | agree that the appeal must be allowed with the con: sequences which have been indicated by the Master of the Rolls.” Those comments on the relationship between the individual and the company apply even more forcibly to the present case, ‘The defendant company is the creature of the first defendant, a device and a sham, a mask whieh he holds before his face in an attempt to avoid reeognition by the eye of equity. The case cited (Gilford Moror Co v Horne [1933] Ch 935) illustrates that an equitable remedy is rightly to be granted dircelly against the creature stances.” Comment When the courts have lifted the veil where ‘companies have been formed or used for an improper purpose, judges have used very colourful language to describe them, In this I y 5 c e « t » u ( s r 1 y 1ne ‘ip ere his | | | dedisidn to |avoid fis jcontractua) ofligation was described as ‘a sham, a|magk’. Russell J referted \o the Gilford case in|his judgment. | fi col AES fonblity ani the Veil df Inco} on i -dmpiny formed by Mr Lipman | Held } 14 Bl the Act. His position 4s principal shareholder Mr Lee was a “wokker ms the medning of | and governing directo did not stop him from ‘There, the company was described as ‘a mere | making a contract of Employment on behalf cloak or sham’. Other descriptions have included ‘a simutacrum’, ‘an alias’, ‘a mere nominee or agent’, ‘a cipher’, ‘no more than a corporate name’, “a straiegem’, and perhaps the most colourful of all, ‘nothing-but a little hut built around his two co-shareholders’. The current favoured label to describe such com- panies is ‘a facade" and the Court of Appeal has recently said that Jones v Lipman is a good cxample of ‘a facade". See Adams v Cape Indusiries ple (above). Lee v Lee’s Air Farming Ltd {1961} AC 12 Privy Council (Viscount Simonds, Lords Reid, Tucker, Denning and Morris) * A principal shareholder and sole gov erning director can contract with his company Facts Mr Lee owned all but one of the 3,000 shares in Lee's Air Farming Ltd and he was also the sole governing director of the company. In accordance with powers granted in the arti cles, Mr Lee as director of the company employed himself to he the chief pilot of the company whose business was that of ‘aerial top dressing’ ~ crop spraying. He was killed Top Spraying when the aircraft crashed Mrs Lee claimed compensation for his death under s3(1) of the New Zealand Workers Compensation Act 1922 which made an employer liable to pay compensation if per sonal injury was caused to a ‘worker’ by reason of an accident in the course of employ Tent. The company's insurers, who were liable to indemnify the company under this Act if the claim succeeded, disputed that Mr Lee was an employee of the company of the company between himself and the company. Lord Morris: “Their Lordships conclude, therefore, that the real issue in the case is whether the pos tion of the deceased as sole governing dizec- tor made it impossible for him to be the servant of the respondent company in the capacity of chief pilot of that company. In their Lordships” view, for the reasons which have been indicated, there was no such impossibility. There appears to be no greater difficulty in holding that man acting in one capacity can give orders 1 himself in ‘another capacity than there is in holding that ‘a man acting in one capacity can make a contract with himself in another capacity The respondent company and the deceased were separate legal entities. The respondent ‘company had the right to decide what con: tracts for acrial topdressing it would enter into. The deceased was the agent of the respondent company in making the neces sary decisions, Any profits earned would belong to the respondent company and not to the deceased. If the respondent company entered into a contract with a farmer then it Jay within its right and power to direct its chief pilot to perform certain operations, The right to control existed even though i would be for the dsccased, in his capacity a agent for the respondent company, to decide what orders to give. The right to control existed in the respondent company and an application of the principles of Salomon v Salomon & Co demonstrates th the respondent company was distinet from the deceased, As pointed out above, there might have come a time when the deceased would remain bound contractually to serve the respondent company as chief pilot though he had retired from the office of sole governing director. Their Lordships con sider. therefore, that the deceased was tsoy dd y 44 Ie | ch ae 1d vi i ees worker and that the question posed in the’ Case Stated should be answered in the affir- mative...” i | ‘Comment The result according to Gower and Davies, Principles of Modern Company Law (7h ed, 2003) at p183 was: ‘In effect the magic of cor- porate personality enabled him to be master and servant atthe same time and to get all the advantages of both (and of limited liability).” Earlier on in his speech Lord Morris said that it was a natural consequence of the decision in Salomon that one person could function in dual capacities. Macaura vy Northern Assurance Co (1925] AC 619 House of Lords (Lords Buckmaster, Sumner, Wrenbury, Atkinson and Phillimore) + An unsecured creditor who is also a principal shareholder has no insurable interest in the company’s property Facts Macaura owned a large timber estate in Co ‘Tyrone with the timber thereon. In December 1919 he assigned the whole of the timber on the estate to a company called Irish Canadian ‘SaW Mills Ld for a total price of £42,000, this, being satisfied by the issue of 42,000 £1 shares to Macaura in the company. At various dates in January and February 1932he insured. the timber against fire with five insurance companies in his own name since most of it had been felled. On 22 February 1922 the timber was destcoyed by fire and Macaura claimed on the policies. The questions arose as to whether he had an insurable interest in the timber by reason of; (a) owning almost all the shares in the company: or (b) by reason of being « creditor of the company. Held He had no insurable interest, airvatereriod Lord Buckmaster: “It must, in my opinion, be admitted that at first sight the facts suggest that there really ‘was no person other than the plaintiff who was interested in the preservation of the timber. Its true thatthe timber was owned by the company, but practically the whole interest in the company was owned by the appellant, He would receive the benefit of any profit and on him would fall the burden of any loss. But the principles on which the decision of this case rests must be indepen- dent of the extent of the interest he held. The appellant could only insure either as a credi- tor or as a shareholder in the company, and if he was not entitled in virtue of either of these rights he can acquire no better position by reason of the fact that he held both charac- ters. As 2 creditor his position appears to me quite incapable of supporting the claim. If his contention were right it would follow that any person would be at liberty to insure the famiture of his debtor, and no such claim has ever been recognised by the cours... Turning now to his position as share- holder, this must be independent of the extent of his share interest. If he were enti- {led to insure because he held all the shares in the company, each shareholder would be equally entitled, if the shares were alin sep- arate hands. Now, no sharcholder has any right o any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues 10 carry on business and a share in the distsibu- tion of the surplus assets when the company is wound up. If he were at liberty to effect an insurance against loss by fire of any item of the company's property. the extent of his insurable interest could only be measured by determining the extent to which his share in the ultimate distribution would be dimin- ished by the loss ofthe assets—a calculation almost impossible to make. There is no means by Which such an interest can be def- initely measured and no standard which can be fixed of the loss against which the con tract of insurance could be regarded as an indemnity .. 2LCorporate Personality and the Veil of Incorporation 13 Lord Sumner: “He owned almost all the shares in the company, and the company owed him a good deal of money, but, neither as credi- tor, nor as shareholder, could he insure the ‘company’s assets. The debt was not exposed to fire nor were the shares, and the fact that the was virtually the company's only credi- tor, while the timber was its only ass seems 10 me t make no difference. He stood in no “legal or equitable relation to” the timber at all. He had no “concern in” the subject insured. His relation was 10 she company, not to its goods, and after the fire he was direcily prejudiced by the paucity of the company's assets, not by the fire No authority has been produced for the proposition that the appellant had any insur- able interest in the timber in any capacity, and the books are full of decisions and dicta that he had none ...” ‘Comment Usually incorporation works to the benefit of those who promote and run the company, however this case is an example of where it operated to the disadvantage of the incorpora- tor. Perhaps with this case in mind, Khan- Freund in (1944) 7 MLR 54, said: ‘Sometimes, as shown by the cases concer: ing insurable interest and the shipowner's limitation of liability, “corporate enti works like a boomerang and hits the man ying to use it” Ord v Bethaven Pubs Ltd (1998) BCC 607 Court of Appeal (Hobhouse and Brooke LIJ, Sir John Balcombe) + The court refused to lift the veil follow- ing the restructuring ofa corporate group Facts The defendants were the owners of the Fox Inn public house and they granted a 20-year lease to the plaintiffs who then invested a sum of money in the pub and ran it. The plaintiffs alleged that the turnover and profit figures supplied by the defendants were incorrect and they commenced an action against them for misrepresentation. The action progressed very slowly, and by 1995 the defendants no longer had substantial assets due to a perfectly proper restructuring within the group. The plaintiffs now sought to substitute the holding company of the group for the defendants, The judge agreed and, relying on Creasey v Breachwood Motors Ltd |1992| BCC 638, lifted the veil of incorporation between the holding company and the defendants and allowed the substitu- tion. The plaintiffs appealed Held ‘The appeal was allowed. The judge’s factual basis for lifting the veil was wrong. No fraud was alleged and the defendant company was not a mere fagade for the holding company. The true facis had not been concealed nor was there any sham. All the restructuring trans tions that took place were overt transactions which did not conceal anything from anybody. Also, the companies were all trading compa- nies which were not interposed as shams or for some ulterior motive, Hobhouse LI: “The second aspect is the factual aspect and the lifting of the corporate veil. As will be appreciated from what I have already sai the judge in the latter part of her judgment does not have proper regard to the evidence, or indeed what she has accepted in the carlier parts. She uses the words “deliber ately ignore the separate corporate identi carrying with it an inference that something improper has been done. Nething improper was done by the group or the companies in the group or their directors. Similarly, she suggests thet there were breaches of duty because she said they deliberately and totally disregarded their duties to the ereditors. That is not the posi tion on the evidence and is not something which she was entitled to say on the evi- dence. Indeed, before us Mr Ashe [counsel for the respondents) has frankly accepted that14 Company Law’ \ he does not put his case in that way. He says no impropriety is alleged. He does not allege that there yas any breach of the provisions of the Insolvency Act, nor wes there any conduct on the part of the directors (or any other person) in 1992 or 1995 which would give tise 10 remedies under the Companies, Act 1985 or under the Insolvency Act. ‘Therefore, he is not able to rely upon any concept of a fault or indeed of fraud in support of his contention that the corporate veil should be pierced. It will be appreci- ‘ted that this immediately puts the facts of this case into a completely different cate- gory from cases such as Wallersieier Vv Moir [1974] 1 WLR 991. Furthermore, he is notable to make out any case that at any stage the company was a mere fagade, oF that itconcealed the true facts, nor that there ‘was any sham. All the transactions thet took place were overt transactions. They were conducted in accordance with the liberties that are conferred upon corporate entities by the Companies Act and they do not ‘conceal anything from anybody. Tne com- panies were operating at material times as, trading companies and they were not being interposed as shams or for some ulterior motive, ‘Therefore, the judge's factual basis was wrong, but she also scems to have relied to some extent on what can be described as a concept of corporate benefit, or a concept of the economic unit. Indeed, in support of this part of his argument Mr Ashe referred to the case of Woolfson v Stratyclyde Regional Council 1978 SLT 159, and DAN Lid v Tower Hamlets LBC (1976) 1 WLR 852. These were both compensation cases which involved questions of valuation of interest which raised much broader criteria than those which are concerned with estab- lishing legal liability of one corporete entity or another for alleged torts or breaches of contract, Bur in any event, the matter was reviewed again by the Court of Appeal in the case of Adams v Cape Indusiries ple [1990] BCC 786; [1990] Ch 433. This case arose in a rather different context of the status of foreign judgments and jurisdiction over ‘companies where a subsidiary in the group was trading in a particular company, and the extent to which what occurred could be attributed to the activity of trading could be aitributed to other companies in the groups. In the course of its judgment, the Court ‘of Appeal considered both what is described as the single economic unit argument of groups of company and the stripping or piercing the corporate veil. They discussed the authorities and they clearly recognised that the concepts were extremely limited indeed. For example in relation to the idea of economie unit, they quoted ({1990] BCC 786 at p822B; [1990] | Ch 433 at p538G) with approval Robert Goff Li in Bank of Tokyo Ltd v Karoon [1987] AC 45n, where he said at p64F: [Counsel] suggested beguilingly that it would be technical for us to distinguish between parent and subsidiary company in tis context; economically, he said they vere one. But we are concemed not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be bridged.” ‘The approach of the judge in the present case was simply to 100k at the economic Unit, o disregard the distinction between the legal entities that were involved and then to say: since the company cannot pay, the shareholders who are the people financially interested should be made to pay instead. That of course is radically at odés with the Whole concept of corporate personality and limited liability and the decision of the House of Lords in Satomon A Salomon & Co Lid (1897) AC 22, On the question of lifting the corporate veil they expressed themselves similarly at [1990] BCC 786 at p26; [1990] 1 Ch 433 at 544, but it is clear that they were of the View that there must be some impropriety before the corporate veil can be pierced. Itis, not necessary to examine the extent or the limitation of the principle because, in the present case no impropriety is alleged. For example, they quoted (at p822E-1 539D-E} what was said by Lord Keith Woolfson concerning the DHN decision. I have'some doubts whether in this respect the 2yCorporate Personality and the Veil of Incorporation 15 Court of Appeal properly applied the prin- iple that itis appropriate to pierce the cor- porate veil only where special circum- stances exist, indicating that it is a mere fagade concealing the true facts. ‘The plaintiffs in the present case cannot bring themselves within any such principle. There is no facade that was adopted at any stage; there was not concealment of the true facts. We pressed Mr Ashe during the course of his submissions as to whether he was making any such suggestion, He was unable to give a satisfactory reply ~ obviously inevitable because there was no basis for suggesting that the was such fagade, it was just the ordinary trading of a group of com- panies under circumstances where, as was said in the Adams case at p826E; S44F, the company is in law entitled to organise the group's affairs in the manner that it does, and to expect that the court should apply the principles of Salomen v Salomon in the ordinary way. Therefore the basis of the Judge's reasoning and the attempt to support it cannot be sustained. That leaves only the case of Creasey v Breachwood Motors [1992] BCC 638, the decision of Mr Southwell ‘There may have been elements in that case of asset stripping. I do not so read the report of his judgment, But he appears to have followed a very similar train of thought to that which was followed by the judge in the present case. Ido not consider it would he useful to analyse his reasoning in view ‘of the comments that I have made about the reasoning of the judge in the present case, But it seems to me to be inescapable that the case in Creasey v Breachwood as it appears to the court cannot be sustained. It repre- sents a wrong adoption of the principle of jercing the corporate veil and an issue of the power granted by the rules to substtuce ‘one party for the other following death or succession, Therefore in ty judgment the se of Creasey y Breachwood should no Fonger be treated is authoritative. Ie also follows from what I have said that consider that the appeal should be allowed and the judge's order should be set aside," ‘Comment On similar facts a substituted defendant was, allowed in Creasey v Breachwood Motors Ltd [1992] BCC 638. The importance of the resent case is that Creasey can no longer be regarded as good authority. R y Philippou (1989) 5 BCC 665 Court of Appeal (O*Connor LJ, Caulfield and Eastham JJ) + A-sole director and shareholder can be convicted of stealing from their own company Facts Phillippou and Panayides were the sole direc- tors and shareholders of Sunny Tours Lid, which was part of the Budget Holiday Group in London that went into liquidation in 1984. Prior to this they withdrew £369,000 from the ‘company’s bank account in 16 transactions. Using this money they purchased a block of flats owned by the company and then trans- ferred the flats toa Spanish company in which they were the sole directors and shareholders. ‘They were charged with theft but argued that as they were the mind and will of the ‘company, the company must be taken to have consented to appropriating the money, thus affording them a defence under s2(1)(b) of the Theft Act 1968, Panayides fell ill during the trial and the case proceeding against Phillippow alone, He was convicted and he appealed. Held The appeal was dismissed. There was no “consent” by the company on which he could rely. O'Connor LI “Mr Thomas submitted that the appellant and Panayides, as sole sharcholders and directors, were the mind and will of Sunny ‘Tours. When they gave instructions to the ‘tank to transfer money to Spain, the insteuc- tions were the instructions of the company, aeWid LL Lk ‘so the company had ¢onsented to the trans- fer in the sense that lhe transfer could not be said to be adverse to any right of the company. But the order to the bank is only fone part of a composite transaction. The other component is the fact that the money ‘was being used to put the block of flats into the pockets of the appellant and Panayides through the Spanish company. That compo- nent was the fact from which the jury could infer not only that the transaction was dis- honest, but was intended to deprive Sunny Tours permanently of its money. For the reasons given by Kerr LI in Attorney. General's Reference (No 2 of 1982) (1984) QB 624, there was no “consent” by the company on which the appellant can rely. His position is not improved by substituting authority" for consent. Once the two com- ponents are put together, the drawing of the ‘morey from the bank is shown to be adverse to the rights of the company and there was ‘an appropriation.” Comment “This case shows that it is possible to steal from ‘one's own company. This had already been decided by the Court of Appeal a few years earlier in Atorney-General s Reference (No 2 cof 1982) {1984} 2 All ER 216, but counsel for Panayides argued that in that case the element of appropriation was wrongly conceded by the defence. This was rejected by O'Connor J who relied heavily on the judgement of Kerr LJ who said: “The basic fallacy in the submission on behalf of the defendants is the contention that, in effect, in 2 situation such as the present a jury is bound to be directed that, when all the members and direciors of a company actin concert in appropriating the property of their company, they cannot. as 4 matter of law, be held to have acted dis. honestly, o¢ that, on such facts, any reason- able jury is bound to reach this conclusion, ‘We entively disagree with both this proposi tions. n our view, forthe reasons explained below. they derive no support from s2(1 \b) of the 1968 Act or from the cases to which the judge referred, 1 & We deal first with the authorities. The Igpeeches in the House of Lords in Tesco ‘Supermarkets Led v Nattrass merely illos- trate that in situations like the present the defendants “are” the company in the sense that any offences commitied by them in relation to the affairs of the company would be capable of being treated as offences com- mitted by the company itself. The decision has no bearing on offences commited against the company. Rv Registrar of Companies, ex parte ‘Attorney-General [1991] BCLC 476 ‘Queen's Bench Division (Ackner LI and Skinner J) + A company formed for the immoral purpose of prostitution was struck off the registrar Facts Lindi St Claire was a prostitute. On the advice of her accountants she decided to operate her business through the medium of a limited company. The Registrar of Companies regis- tered Lindi $t Claire (Personal Services) Ltd, whose main object was ‘to carry on the busi- ness of a prostitute’. About a year later the ‘Attorney-General applied for judicial review of the registrar's decision to register the company and sought an order of certiorari to ‘quosh the incorporation and registration. Held The company's objects were illegal and it was therefore siruck off the register. Ackner LI This application has many of the indicia that one might expect to find in a student’s end of term moot. It appears indirectly to have been stimulated by the action of the Policy Division of the Inland Revenue. ‘The Attorney-General applies to quash the incorporation and registration by the Registrar of Companies nearly a year ago, that is on 18 December 1979, of Lindi Sthe to io Corporate Personality and the Veil of Incorporation 17 Claire (Personal Services) Ltd as a limited company under the provisions of the ‘Companies Acts 1948 t0 1976. The grounds of the application, to state them quite briefly, are these. In certifying the incorporation of a company and in regi tering the same the Registrar of Companies acted ulira vires or misdirected himself or otherwise erred in law, in particular as to ‘he proper construction and applicztion of sI(1) of the Companies Act 1948 [s1(1) CA 1985) in that the company was nat formed {or any lawful purpose but, on the contrary, was formed expressly with the- primary object of carrying on the business of prost- tution, such ‘being an unlawful parpose involving the commission of acts which are immoral and contrary to public policy. ‘The first point to consider is the validity of the procedure which has been adopted in this ease, that is by way of application for judicial review, such application being made by the Atiomey-General Section 15 of the Companies Act 1948 [513(7) CA 1985] provides: “(1) A certificate of incorporation given by the regisirar in respect of any associa- tion shall be conclusive evidence that all the requirements of this Actin respect of registration and of matters precedent and incidental thereto have been complied with, and that the association is a company authorised to be registered and dhly fegisiered under this Ast That on the face of it would appear to be a difficalty in the way of this application, but the matter was dealt with in the case of Bowman v Secular Society Ltd (1917) AC 406. 119 16-17] AIL ER Rep 1. In that case the Secular Society was registered as a company limited by guarantee under the Companies Acts 1852 to 1803. The ques- tion which there had 9 be considered was whether ils objects were legal, criminal or ‘otherwise such that be repisiered. ‘The matter of procedure was dealt with by Lord Parker in his speech in these terms ((1917] AC 406 at 439, [1916-17] All ER Rep Lat 17) “My Lords, some stress was laid on the Public danger, or at any rate the anomaly, Of the Courts recognising the corporate existence of # company all of whose objects, as specified in its memorandum, of association, are transparenily illegal Such a case is not likely to oceur, for the registrar fulfils a quasi-judicial function, and his duty is to determine whether an association applying for registration is authorised to be registered under the Acts. Only by misconduct or gt company with objects wholly illegal obtain registration, If such a case did ‘occur it would be open tothe Court to stay its hand until en opportunity had been given for taking the appropriate steps for the cancellation ofthe certificate of eg- istration, It should be observed that neither I of the Companies Act 1990. nor the corresponding section of the Companies (Consolidation) Act 1908, so expressed as to bind the Crown, and the Atiomey-General, on behalf of the Crown, could institute proceedings by ‘way of certiorari to eancel a registration which the registrar in affected discharge ‘of his quasi-judicial duties had improp- erly or erroneously allowed." ‘Then he deals withthe instant cas. ‘That view wes expressly accepted in his speech by Lord Dunedin and was referred to by Lord Buckmaster in shorter terms at the conclusion of his speech (see [1917] AC 406 ct 478, [1916-17] AILER Rep | at 38). So clearly the Attorney-General is entitled to bring these proceedings. Now as to the facis, these come within a short compass and they amount to the fol lowing. A firm of certified accountants, iison Clip & Co, on 16 August 1979 wrote to the Registrar of Companies at Companies House, Crown Way, Maindy, Cardiff pointing out that they had received a letter from the Inland Revenue Policy Division, who stated that they considered prostitution to be a trade which is fully taxable, and that they, the certified accoun- tants, saw no reason why their client should not be able to organise her business by way of a limited company. They asked whether 2718 Company Law)» the name “Prostitute Ltd” was available for registration as a limited company, pointing ‘out the main object of the company would be thatof organising the services of aprosti- tue. The registrar did not like that name and not accept it, nor did he accept another name “Hookers Ltd” which was offered But subsequently two further names were offered, “Lindi StClaire (Personal Services) Ltd” and "Lindi St Claire (French Lessons) Ltd”, and it was the former which he regis: tered. ‘The memorandum of association said in terms that the first of the Objects of the company was “To carry on the business of prostitution” The only di ctor of the company is Lindi St Claire, Miss St Claire describing herself specifically as “Prostitute”, The other person who owns also one share is a Miss Duggan, who is referred to as “the cashier”. Leave having been obtained 10 apply for judicial review, Miss St Claire wrote in these terms: “I would like to say that prostitution is not tall unlawful, as you have stated, ard I feal it is most unfair of you to take this view, especially whea I am paying income tax en my earnings from prosti- tution to the government Inland Revenue. Furthermore, | fee! it is most untair of you to imply that Ihave acted wrongly, fas T was most explicit to all concerned about the sole trade of the company to be that of prostitution and nothing more. If my company should not be deemed valid, then it should have not been granted in the first place by the Board of Trade. It is, most anfair of the government t0 allow me to go ahead with my company one ‘moment, then quash it the next. In regard 10 that paragraph Miss St Claire is perfectly right that she as most explicit 10 all concerned as to the trade of the company, fand in that paragraph she confirms that is was the sole ade of the company. Mr Simon Brown on behalf of the Auorney- General, concedes that, if the company should not be deemed valid, then it should not have been registered in the first place by the Board of Trade, ang therefore the issue with which we are concerned is the validity of the registration, That takes us to s1(1) of the Companies Act 1948 [s1(1)'CA 1985}, and I need only read that subsection: “Any seven or more persons, of. where the company to be formed will b a private company, any tv0 or more persons, ass: ciated for any lawful purpose may, by subscribing their names to # memoran: ‘dum of essociation and otherwise com- plying with Ute requirements of this Act in respect of registration, form an incor- porated company, with or without limited lisbiiy.” Icis well settled that a contract which is made upon a sexually immoral consider: tion oF for a sexually immoral purpose against public policy and i illegal and unen- forcenble. The fact that it does not involve ‘or may not involve the cortmission of a criminal offence in no way prevents the con tract being illegal, being against public policy and therefore being unenforceable Hore, as the documents clearly indicate, the association is for the purpose of carrying on a trade which involves illegal contracts because the purpose is a sexually immoral purpose and as such against public policy Mr Simon Brown submits that if that is the position, as indeed it clearly is on the authorities, then the association of the to oor more persons cannot be for “any lawful purpose” ‘To my mind this must follow. tis implie itly in the speeches in the Bowman ease to which Thave just made reference. In my judgment, the contention of the Attorney- General isa valid one and 1 would order that the registration be therefore queshed. Comment 1 ‘This is a rare illustration of a successful application by the Attorney-General 10 have a company’s registration cancelled. ‘This will normally be very rare because of 313(7) CA 1985 which provides that the certificate of incorporation is conclusive ‘evidence that the requirements of the Act in respect of registration have been com. 28ful to od sof the Act Corporate Personality and the Veil of Incorporation 19 plied with. The section does not however state that the certificate is conclusive evi- dence that the objects are lawful, and in Bowman v Secular Society Ltd (1917] AC 406 it was stated that s13(7) does not bind the Crown so that the Attorney-General can bring proceedings to have the company's registration cancelled by an order of certiorari in the event of unlawful objects. 2, The existence of s13(7) is also the reason why it was felt unnecessary to implement the relevant provisions of the First Company Law Directive 68/151 (9 March 1968), dealing with defective incorpora- tions and nullity of companies. However, in an earlier edition Gower, Principles of Modern Company Law (6th ed, 1997) at p1l4 was of the view that legislation is needed as the present law is unsatisfactory and is not wholly consistent with our obli- gations under the First Directive. One of the problems is that if an order of certiorari is obtained, and the company's registra- tion is cancelled, ithas retrospective effect so that the company is treated as never having existed. However, the provisions of the Dircctive suggest that the company should be wound up instead. This differ- ence in approach is crucial when consid ering the status and validity of transactions entered into before the company's regis. tration is cancelled. if the company is treated as never having existed, then the transactions ought (0 be considered as void as it is not possible to contract with anon existent person. Salomon v A Salomon & Co [1897] AC 22 House of Lords (Lord Halsbury LC, Lords Watson, Herschell, Macnaghten, Morris and Davey) + A company has a separate legal per- sonality from that of its members Facts For about 30 years Aron Salomon carried on business as a leather merchant and wholesale boot manufacturer under the style A Salomon & Co. He had a wife and daughter, and five sons. Four of the sons worked with Mr Salomon in the business and in 1892 in order to satisfy their requests for 2 share in the busi ness he turned his business into a limited company. The company had a share capital of £39,000, ‘a sum which represented the san. guine expectations of a fond owner rather than anything that can be called a businesslike or reasonable estimate of value’. The subscribers, to the memorandum were Mr Salomon, his and daughter and four of his sons and 20,007 shares were issued, of which Mr ‘Salomon received 20,001 and the other sub- seribers one each. The company paid the pur- chase price of the business by, inter alia, issuing debentures of £10,000 to Mr Salomon. The business was solvent at the date it was transferred to the company but shortly afier- wards there was a great depression in the boot and shoe trade and strikes too. As a result the business suffered heavy losses and, despite injections of cash by Mr Salomon and his mortgaging his debenture for a £5,000 loan for the business, it eventually collapsed. The ‘company was ordered to be wound up in ‘October 1893 and after payment of the mort- gage debt and interest thereon there was only £1,055 to satisfy unsecured debts of £7,773, plus the amounts owed to Mr Salomon on his debentures. Mr Salomon elsimed the £1,055 and the liquidator countecclaimed alleging that Mr Salomon was liable to indemnify the ‘company against the whole of the unsecured debis. At First instance Vaughan Willi took the view that the company was Salomon's agent and held him liable to indem- nify the company. The Court of Appeal upheld this decision but on different grounds, namely, that the relationship of the company to Mr Salomon was thal of trustee to cestui ‘que trust. On appeal to the House of Lords: 2920. Company Law Held ‘The company had been validly formed under the Companies Act 1862 and, on the terms of that Act, the company was a different person from the subscribers to the memorandum. The company’s property and debts were its alone and in its activities it was not the agent of Mr Salomon but instead he was the agent of the company. Lord Halsbury LC: ‘Lam simply here dealing with the pro: sions of the statute, and it seems tome to be essential to the artificial creation that the law should recognise only that artificial exis tence ~ quite apart from the motives or conduct of individual corporators. In saying this, Ido not at all mean to suggest that if it could be established that this provision of the statute to which Iam adverting had not been complied with, you could not go behind the certificate of incorporation to shew that a fraud had been committed upon the officer entrusted with the duty of giving the certificate, and thet by some proceeding inthe nature of scire facias you could not prove the fact that the company had no real legal existence. But short of such proof it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took pari in the promotion of the company are absolutely irrelevant in discussing what those rights end liabilities are {will for the sake of argument assume the proposition that the Court of Appeal lays down ~ that the formation of the company was a mere scheme tocnable Aron Salomon to carry on business in the name of the ‘company. Tam wholly unable to follow the proposition that this was contrary to the true intent and meaning of the Companies Act. L can only find the true intent and meaning of the Act from the Act itself: and the Act appears to me to give a company a legal existence with, as Ihave said, righis and lia- bilities of its own, whatever may have been the ideas or schemes of those who brought it into existence. Lobserve that the learned judge (Vaughan Williams J) held that the business was Mr ‘Salomon’s business, and no one else’, and that he chose to employ as agent a limited ‘company; and he proceeded to argue that he was employing that limited company as agent, and that he was bound to inderanify that agent (the company). I confess it seems to mec that that very learned judge becomes involved by this argument in a very singu lar contradiction. Either the limited ‘company was 2 legal entity or it was not. If it was, the business belonged to it and not to Mr Salomon, If it was not, there was no person and no thing to be an agent at all; and tis impossible to say at the same time that there is a company and there is not, Lindley LJ, on the other hand, affirms that there were seven members of the company; but he says it is manifest that six of them ‘were members simply in order to enable the seventh himself to carry on business with limited liability. The object of the whole arrangement is to do the very thing which the Legistature intended not to be done. It is obvious to inquire where is that inten- tion of the Legislature manifested in the statute. Even if we were at liberty to insert ‘words to manifest that intention, [should have grat difficulty in ascertaining whet the exact intention thus imputed 10 the Legislature is, or was. In this particular case itis the members of one family that repre sentall the shares; but ifthe supposed inten: tion is not limited to so narrow a proposition ‘as this, that the seven shareholders must not bbe members of one family, to what extent may influence or authority or intentional purchase of a majority among the share holders be carried so as to bring it within the supposed prohibition? tis, of course, ‘easy (0 Say thal if was contrary to the inten- tion of the Legislaiure — 2. proposition which, by reason of its generality, itis dif ficult to bring to the est; but when one seeks toput asan affirmative proposition what the thing is which the Legislature has prohib: ited, there is, as it appears to me, an insu- perable difficulty in the way of those who seek to insert by construction such 2 prohi- bition into the statute Lo i © $ a y ° ® s b w e b ’ e c b c a r b a 9 yCorporate Personality and the Veil of Incorporation a My Lords, the truth ig that the learned judges have never allowed in their own ‘minds the proposition that the company has, a real existence, They have been struck by what they have considered the inexpediency of permitting one man tobe in influence and authority the whole company: and, assum- ing that such a thing could not have been intended by the Legislature, they have sought various grounds upon which they right insert into the Act some prohibition of such a result. Whether such a result be right ‘oF wrong. politic or impotitic, I say, with the ‘utmost deference to the learned judges, that we have nothing to do with that question if this company has been duly consticuted by Jaw; and, whatever may be the motives of those who constitute it, I must decline to insert into that Act of Parliament limitations ‘which are not to be found there.” Lord Macnaghten: “The company had a brief career: it fll upon evil days, Shortly after i was started there seems (0 have come a period of great depres the boot and shoe trade. There were strikes of workmen too; and in view ‘of that danger contracts with public bodies, which were the principal source of Mr Salomon’s profit, were split up and divided between different firms. The attempis made to push the business on behalf of the new company crammed its warehouses with unsaleable stock. Mr Salomon scems to have done what he could: both he and his wife lent the company money: and then he got his debentures cancelled and reissued to 4 Mr Broderip, who advanced him £5,000, which he immediately handed over to the company on loan, The temporary relief only hastened ruin. Mr Broderip's interest was Ot paid when it became due, He ook pro. ceedings at once and got a receiver appointed. Then, of course came liquidation and a forced sale of the company's assets, They realised enough to pay Mr Broderip, ‘but not enough to pay the debentures in full and the unsecured creditors were conse: quently left out in the cold, In this state of things the liquidator met Mr Broderip's claim by a counter-claim, to which he made Mr Salomon a defendant. He disputed the validity of the debentures on the ground of fraud. On the same ground he claimed rescission of the agreement for the transfer of the business, cancellation of the cebentures, and repayment by Mr Salomon of the balance of the purchase-money. In the alternative, he claimed payment of £20,000 on Mr Salomon’s shares, alleging that nothing had been paid on them. ‘When the trial eame on before Vaughan Williams J, the validity of Mr Broderip's claim was admitted, and it was not disputed that the 20,000 stares were fully paid up. ‘The case presented by the liquidator broke own completely, but the leamed judge sug- gested that the company had 2 right of indemnity against Mr Salomon. The signs tories of the memorandum of association were, he said, mere nominees of Mr Salomon ~ mere dummies. The company was Mr Salomon in another form. He used the name of the company as an alias, He employed the company as his egent: so the ‘company, he thought, was entitled to indem- ‘ity against its principal. The counter-claim was accordingly amended to raise this point; and on the amendment heing made the Teamed judge pronounced an order in accor dance with the view he had expressed. The order of the leamed judge appears to me to be founded on a misconceptioa of the scope and effect of the Companies Act 1862. In order to form a company limited by shares, the Act requires that 2 memoran- dum of association should be signed by seven persons, who are each to take one share at least. [f those conditions are com- plied with, what can it matter whether the signatories are relations or strangers? There is nothing in the Act requiring thatthe su scribers to the memorandum should be inde- pendent or unconnected, oF that they oF any fone of them should take a substantial inter- est in the undertaking, or that they should have a mind and will oftheir own, as one of the learned Lords Justices seems to think, or that there should be anything like 3 balance of power in the constitution of the company. In almost every company that is formed the statutory number is eked out by22 Company Law | clerks or friends, who sign their names al the request of the promoter pr plométer ‘without intending to take any further part or interest in the matter. ‘When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are « body cor- porate “capable forthwith”, to use the words Of the enactment, “of exercising all the func- tions of an incorporated company.” Those are strong words. The company attains maturity on its birth. There is no period of minority —no incerval of incapacity. I cannot understand how a body corporate thus made “capable” by statute can lose its individual- ity by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not. The company is at law a different person altogether from the sub- scribers to the memorandum; and, though it may be that alter incorporation the business is precisely the same as it was before, and the same persons are managers, and the ‘same hands receive the profits, the company is not in law the agent of the subscribers oF trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner pro- vided by the Act. That is, T think. the declared intention of the enactment. If the view of the learned judge were sound, it ‘would follow that no common lew partner- ship could register as a company limited by shares without remaining subject to unlim- ited tability ‘Mr Salomon appealed: but his appeal was dismissed with costs, though the Appellate ‘Court did not entiely accept the view of the Court below. The decision of the Court of Appeal proceeds ona declaration of opinion embodied in the order which has been already read, Tmust say that J, too, have great difficulty jn understanding this declaration. If it only ans that Mr Salomon availed himself to the full of the advantages offered by the Act of 1862, what is there wrong in that? Leave out the words “contrary to the true intent and meaning of the Companies Act 1862" and bear in mind that “the creditors of the company” are not the creditors of Mr { | algmon, and the declaration is perfectly rengfitHasno stinginit. ||| au bn cas, whic in some fis pect is not unlike te present, the owners Ped cited Go quot the language at Gitfsed LI inthe Cour of Appeal) “went on working the colliery not very successfully, and then determined to form a limited company in order to avoid incurring further personal liability”, “It was", adds the Lod Justice, “the policy of the Companies Act to enable this to be done". And so he reversed the decision of Malin V-C, who had expressed an opinioa that ifthe laws of the country sanctioned such « proceeding they were “in a most lamentable state", and had fixed the former owners with liability for the amount ofthe shares they took in exchange for their property: In re Baglan Hall Colliery Co (1870) LR'5 Ch 346 ‘Among the principal reasons which induce persons to form private companies, asis stated very clearly by Mr Palmer ia his treatise on the subject, are the desire to avoid the risk of bankruptcy, and the increased facility afforded for borrowing ronicy, By means ofa private company, as Mr Palmer observes, a trade can be carried on with imited liability, and without expos- ing the persons interesied in it in the event of failure to the haish provisions of tie baakrupicy law. A company, 100, ean raise money on debentures, which an ordinary trader cannot do. Any member of a company, acting in good faith, is as much entitled to take and hold the’ company’s debentures as any outside creditor. Every ereditor sented to getand to hold the best security the law allows him to take. If, however, the declaration of the Cour of Appeal means that Mr Salomon acted fraudulenly or dishonesty, I must say [can find nothing inthe evidence to support such an imputation. The purpose for which Mr Salomon and the other subscribers to the memorandum were associated “Was "asi" The fact that Mr Salomon raised £5,000 for the company on debentures that belonged to him seems to me strong € dence of his goad faith and of his conti dence in the company, The unsecured cred- Bz| i | Corporate Petsonality and the Veil of Intorporption | |23 itors of A Salomon and Company, Limit ‘may be entitled to sympathy, but they have only themselves to blame for their misfor~ tunes. They trusted the company, I suppose, because they had long dealt with Mr Salomon, and he had always paid his way; but they had full notice that they were no longer dealing with an incividyal, and they must be taken to have been cognisant of the memorandum and of the articles of associa- tion. For such a catastrophe as has occurred in this case some would blame the law that allows the ercation of a floating charge. But 4 floating charge is too convenient a form of security to be lightly abolished. I have long thought, and | believe some of your Locdships also think, that the ordinary trade creditors of a trading company ought to have a preferential claim oa the assets in lig- uidation in respect of debts incurred within a certain limited time before the winding-up. But that is rot the law at present, Everybody knows that when there is a winding-up debenture-holders generally step in and sweep olf everything: and a great scandal it It has become the fashion to call compa- nies of this class “one man companies” ‘That is a taking nickname, but it does not help one much in the way of argument. Ifit is iniended to convey the meaning that a company which is under the absolute control of one person is not a company legally incorporated, although the require ments of the Act of |862 may have been complied with, itis inaccurate and mislead- ing: if it merely means that there is a pre dominant partner possessing an overwhelm- ing influence and entitled practically to the whole of the profits, there is nothing in that that lean sce contrary tothe truc intention of the Act of 1862, of against public policy, or detrimental to the interests of creditors. If the shares are fully paid up, it eannot matter whether they ere in the hands of one or many. Ifthe shares are not fully paid, iis as easy to gauge the solvency of an individ- val as to estimate the financial ability of a crowd. Tam of the opinion that the appeal ought to be allowed, and the counter-claim of the company dismissed with costs, bottt here and below.’ | | Comment { ‘This case firmly ensil hed one of the| fundamental principles of company law, | that of separate legal personality. On for mation of the company a veil of incorpo- ration is drawn over the company separat- ing it from it members, director and credi tors. Commentators have not always wel- comed the decision. In an article of the same year, in (1897) 13 LQR 6, Salomon & Co Ltd was described as ‘one trader and sicdummies’, and in his famous article on company law reform, Oto Kahn-Freund described the decision as ‘calamitous: see [1944] MLR 54. By virtue of s1(3A) CA 1985 itis now possible to form a private company with just one member. who may also be the sole director. . Occasionally the court will lift the veil of incorporation and disregard the corporate personality. The speech of Lord Halsbury identifies two such occasions, namely, where fraud js present or the company being used as an agent by the incosporator. However, the exact circumstances when the courts will lift the veil has taxed the minds of judges and academics for just cover the 100 years since Salomon was decided. During the 1970s the courts appeared to adopt a more liberal approach to the veil of incorporation, notably Uirough the efforts of Lord Denning. However, in recent years there has been a return to the strict approach of Salomon in upholding the veil. See Adams v Cape Industries ple (above Sometimes, when construing legislation, the court will not treat a company as a “person”. In Rv Home Secretary, ex parte Atlantic Commercial Ltd [1997] BCC 692, a company applied for compensation under $133 of the Criminal Justice Act 1988 following the quashing of its convic- tion for exporting machine guns. Popplewell J held that the word ‘person’ in aS24 Company Law the section did not include a company. The ‘wording of the section referred to compen sation being payable if *he has been par- doned’ and ‘if he is dead, to his personal representatives’. The compensation also required ‘suffering’. Such wording was as 2 matter of construction inappropriate to cover a company. Smith, Stone & Knight Lid y Birmingham Corporation [1939] 4 AILER 116 King’s Bench Division (Atkinson J) + Lifting the corporate veil between a group of companies Facts ‘The plaintiff company formed the Birming- ham Waste Co Ltd, and ran it as a wholly owned subsidiary. All the profits of this company were treated as the profits of the parent company and it was under the control of the parent company. In 1935 Birmingham Corporation wished to compulsorily acquire the buildings belonging to the subsidiary to use the land on which they stood to build a technical college. The parent company claimed compensation pursuant to statute for disturbance, but the corporation claimed that the subsidiary was the proper claimant, Held The subsidiary company was operating as an agent on behalf of the parent company, and therefore the parent company could claim the compensation. Atkinson J: “Those being the facts, the corporation rest their contention on Safomon's case [1897] AC 22, and their argument is that the Waste company was a distinct legal entity. It was in occupation of the premises, the business was being carried on in its name and the claimants’ only interest in law was that of holders of the shares, It is well settled that the mere fuct that a man holds all the shares in a company does not make the business carried on by that company his business, nor does it make the company his agents for the carrying on of the business. That proposition is just as true if the shareholder is itself @ limited company. It is also well settled that there may be such an arrangement between the shareholders and acompany as will con- stituie the company the sharcholders’ agent for the purpose of carrying on the business and make @ business the business of the shareholders. In Gramophone & Typewriter Lid ¥ Stantey [1908] 2 KB 89 Cozens-Flardy MB said at pp95, 98: “The fact that an individual by himself or his nominees holds practically all the shares in a company may give him the contol of the company in the sense that is may enable him by exercising his voting powers to turn out the directors and to enforce his own views as to policy, but it does not in any way diminish the righis and powers of the directors, oF make the property or assets of the ‘company his, as distinct from the corpora tion's. Nor does it make any difference if he acquites not practically the whole, but absolutely the whole, of the shares. The business of the company does not thereby becomes his business. He is still entitled to receive cividendls on his shares, but no more. 1 do not doubt that a person in that position may cause such an errangement tobe entered into between himself and the company as will suffice to constitute the company his agent for the purpose of car. rying on tho business, and thereupon the business will become, for all wxing pur poses, his business. Whether this conse quence follows is in each case a matter of feet In the present case Lam unable 10 discover anything in addition 10 the holding of the shares which in any way ‘supports this conclusion.” ‘Then Fletcher Motion LJ, said the same thing on pp100 and 101 Itseems therefore to be a question of fact jn each case, and those eases indicate that the question is whether the subsidiary was carrying on the business as the company's business or as its own, Thave looked at 2 number of eases ~ they are all revenue cor the sid qu cle be or co. to sat t My || ‘cases —to See whal the courts regarded Of importance for determinibg that question ‘and I find six points whigh were decr relevant for the determination of the ques- tion: Who was really carrying on the busi- ness? In all the cases, the question was ‘whether the company, an English company here, could be taxed in respect of all the profits made by some other company, @sub- sidiary company, being cartied on else- ‘where, The first point was: Were the prof treated as the profits of the company? ~ ‘when I say “the company” Imean the parent ‘company ~ secondly, were the persons con- ducting the business appointed by the parent company? Thirdly, was the company the head and the brain of the trading venture? Fourthly, did the company govern the adventure? Fifthly, did the company make the profits by its skill and direction? Siathly, ‘was the company in effectual and constant conirol? Now if the judgments in those cases are analysed, it will be found that all those matters were deemed relevant for con- sideration in determining the main question and it seems to me that every one of those ‘questions must be answered in favour of the claimants. Indeed, if ever one company can be said to be the agent or employee, oF too! ‘or simulacrum of another, [think the Waste company was in this case a legal entity, because that isa it was. There was nothing to prevent the claimants at any moment saying “We will carry on this business in our own name.” They had but to paint out the Waste company's name on the premises, change their business paper and form, and the one thing would have been done. 1 am satisfied thai the business belonged to the claimants; they were, in my view the real occupiers of the premises i Comment 1 Whether an agency relationship exists between one company and another, or between an incorporator and his company, is a question of fact. The ease law since this decision illustrates that establishing the fact of agency in such circumstances is both difficalt and rare. | f Veil of Incbrpgragon ong Line Ltd of Korea v Rendsbutg Invasiments Cop of Liberla, Te Rialto (No2) {1998} BEC 470 Foulsonl rejected submission thyt the sik questibns poséd by Atkinson J shoull! be used asia géneral approach to determining the qlestion of agency. His Lordship felt that! ‘On that approach, Salomon’s case would surely have been decided differently, as the jude- ments of the Court of Appeal in that case illustrate.’ The decision in Smith, Stone & Knight is also criticised by Farrar, Farrar's Company Law (Ath ed, 1998) at p71 where it is said that Atkinson J's approach is conceptually incoherent as the fourth, fifth and sixth questions cover very much the same ground." Standard Chartered Bank y Pakistan National Shipping Corp (No 2) [2003] 1 BCLC 244 House of Lords (Lords Hoffmann, Mustill, Slynn of Hadley, Hobhouse of Woodborough and Rodger of Earisferry) + A managing director was personally liable for the tort of deceit Facts Mehra was the managing director of Oakptime International pic (Ozkprime}. He traudutently misrepresented the date in a bill of lading in order for Oakprime to obtain payment under a letter of credit from the Standard Chartered Bank of Pakistan (SCB), Cresswell’J awarded damages against Mekra for deceit, but the Court of Appeal allowed his appeal on the ground that he had made the fraudulent misrepresentation on behalf of Oakprime and not personally. SCB appealed to the House of Lords. Held The appeal was allowed and the award of damages against Mehra by Cresswell J was restored. A director cannot escape liability for deceit on the ground that their act was com- mitted on behalf of the company 3s26 © Company Law Lord Hoffmann: bs *[20] My Lords, 1 come next to'the question of whether Mr Mehra was liable for his deceit. To put the question in this way may seem tendentious bat I do not think that itis unfair. Mr Mehra says, and the Court of Appeal accepted, that he committed no deceit because he made the representation on behalf of Oakprime and it was relied upon asa representation by Oakprime. That is true but it seems to me irrelevant. Mr Mehra made a fraudulent misrepresentation intending SCB to rely upon it and SCB did rely upon it. The fact that by virtue of the law of agency his representation and the knowledge with which he made it would also be attributed to Oakprime would be of interest in an action against Oakprime. But that cannot detract from the fact that they were his representation and his knowledge He was the only human being involved in making the representation to SCB (apart from administrative assistance like someone to type the letter and carry the papers round to the bank). Ibis true that SCB relied upon Mc Mehra's representation being attributable to Oukprime because it was the beneficiary under the credit. But they also relied upon it being Mr Mehra's representa- tion, because otherwise there could have been no representation and no attribution. [21] The Court of Appeal appear to have based their conclusion upon the decision of your Lordships’ House in Williams. v Naturat Life Health Foods Ltd (1998] 2. All ER 577, [1998] | WLR 830, That was an action for damages for negligent misrepre- sentation. My noble and learned friend, Lord Steyn, pointed out that in such a case Hiability depended upon an assumption of responsibility by the defendant. As Lord Devlin said in Hedley Byrne & Co Lid Heller & Partners Ltd [1963] 2 All ER 575 at 61 1, [1964] AC 465 at $30, the basis of liability is analogous to contract. And just as an agent can contract on behalf of another ‘without incurring personal liability, so an agent can assume responsibility on behalf of another for the purposes of the Hedley Ryrne rule without assuming personal responsibility. Their Lordships decided that on the facts of the case, the agent had not assumed any personal responsibil {22] This reasoning cannot in my opinion apply to liability to fraud, No one can escape liability for his fraud by saying “I wish to ‘make it clear that am commiting this freud ‘on behalf of someone else and I am not to be personally liable”. Evans LI framed the questions being “whether the director may be held liable for the company’s tort” ({2000] 1 AI1 ER (Comm) | at 20). But Mr Mehra was not being sued for the company’s tort. He was being sued for his, ‘own tort and all the elements of that tort were proved against him. Haying put the question in the way he did, Evans LJ answered it by saying that the fact that Mr ‘Mehra was a director did not in itself make him liable. That of course is true. He is Tiable not because he was a director but beceuse he committed a fraud. [23] Both Evans and Aldous LIJ treated Williams’ case as being based upon the sep- ‘arate legal personality of a company. Aldous Li (at 24) referred 10 Salomon v A Salomon ard Co Ltd [1897] AC 22, {1895-9] All ER Rep 33. But my noble and learned friend, Lord Steyn, make it clear ({1998] 2 All ER S77 at $82, [1998] | WLR 830 at 835) that the decision had nothing to do. with ‘company law. It was an application of the law of principal and agent to the require: ment of assumption of responsibility under the Hedley Bye principle. Lord Steyn said it would have made no difference if Me Willisms’s principal had been a natural person. So.one may test the matter by asking whether, if Mr Mehra had been acting as ‘manager for the owner of the business who lived in the south of France and had made a fraudulent representation withia the scope of bis employment, he could escape per- sonal liability by saying that it must have been perfeetly clear that he was not being fraudulent on his own behalf but exclusively on behalf of his employer. [24] I would therefore allow the appeal against Mr Mehra and restore the order which Cresewell J made against him.”{ | i Corporate Personalit Lord Rodger of Earlsferry: “{35] The result of the Court of Appeal’s reasoning really comes to this a director can himself orchestrate and execute a scheme of deceit, can himself submit false docu- ments (0 & bank with the intention that they should pay and suffer loss. but, provided that he can be said to have carried out all these fraudulent acts “on behalf of” or “as the company of which he is a director, he is not to be held personally liable for the resulting loss. Only the company — which inthis particular case does not seem to have een worth powder and shot —is liable. The dircetor himself can be held fable, itis said, ‘on on “the converse of vicarious liability”, by being held liable for the company’s tortif “he ordered or procured the acts of other persons which render the company liable” (per Evans LJ at 20). So, in this case, Mr Mehra does the fraurlulent acts as a director of Oakprime, Oakprime are accordingly liable for those acts but Mr Mehra cannot be held personally lisble for his own acts because they did not involve ordering or procuring others to perform the fraudulent ets which make the company liable. Understandably, Evans LI showed some signs of unease at the conclusion to which his reasoning had led him, [36] The incorporation of companies is vitally important for commerce since it allows transactions to be entered into and. carried out, property to be held and actions to be raised by, oF against, a body which continues in existence despite changes inthe individuals who conduct or invest in the business. The company isa seperate entity, Gistinei from the directors, employees and shareholders. The law has rightly insisted thal the distinction should be duly observed (see Lee v Lee's Air Farming Ltd |1960)3 AILER 420, [1961] AC 12), In particular the company does not act as the agent of the directors and, in general, they do not incur personal liability for the acis ofthe company or its employees (see Rainham Chemical Works Led (in liq) v Belvedere Fish Guano Co Lid {1921] AILER Rep 48 at 58 per Lord Parmoor), Directors may. however, be per- i ad id the Veil of Incorporation ia | ‘ | sonhlly Jiable if they directed of procured | the commission of a wrongful act. The exact scope of this type of liability has been dis- cussed in a line of cases. Performing Right Society Lid v Ciryl Theatrical Syndicate Lid [1924] 1 KB 1 at 14 per Atkin LI and C Evans & Sons Ltd v Spritebrand Lad (1985] 2 AILER 415, [1985] | WLR 317 may serve as examples. [37] A hallmark of modem companies is that the liability of the shareholders is limited. This is not a necessary characteris- tic of a commercial corporation. Indeed even for some time afier the Limited Liability Act 1855 there were major trading entities which had been incorporated but the investors in which were exposed to unlim- ited liability for the corporation's debis. This could, and not infrequently did, result in the investors’ ruin. By reducing and defining the potential risk to investors, limited liability opens the way for modern companies io raise the necessary capital for their business, either privately or on the stockmarket. For this reason, only in excep tional circumstances does the law allow a creditor of the company to pierce the veil of incorporation and fix the sharcholders with personal liability (see Salomon v A Salomon and Co Lid {1897] AC 22, [1895-9] Al ER Rep 33). [38] Although Aldous LJ referred to lifting the corporate veil, the question of the limited liability of shareholders is irelevant to the preseatissuc since SCB do not seek to make Mr Mehra liable as a shareholder in Oakprime. Nor do SCB seek to make Mr Mehra liable, by virtue of his position as a director, for the deceitful acts of Oakprime or its employees or other agents. Rather, they seek todo no moe than held hirn liable for deceitful acts that he himself performed So no question arises as to whether he directed or procured the doing of tortious acts by others and the C Evans & Sons line of cases in not in point. [39] At the heatt of the Court of Appeal’s decision is the view that, because Me Mehra was a direetor of Oakprime and acted as such when cheating SCB, his acts must be regarded solely as the acts of Oakprime and 3728 Company Law he should have no personal civil liability for them. As Mr Cherryman QC acknowledged, no man could escape the clutches of the criminal law by the simple device of showing that he had carried out his frauds in his capacity as a director of a company and in circumstances where his ects were to be attributed to the company (see Meridian Global Funds Management Asia Lid v Securities Commission (1995] 3 AMER. 918, [1995] 2 AC 300). In Rv ICR Haulage Led [1944] 1 AILER 69] at 695, [1944] KB 551 st $59, for example, both the managing director and, through him, the haulage company were convicted of conspiracy to defraud. His acts “were the acts of the company and the fraud of that person was the fraud of the company”. In the world of tort, however, all was said to be more happily arranged for the fraudster. He could use the device of acting as a director to escape any liability to his victims: they were to be regarded noi as his victims but just as the victims of the company's fraud, His fraud might be the fraud of the company but, somehow of other, it was not his own fraud, {40] My Lords, the maxim culpa tenet suos avctores may not be the end, but itis the beginning of wisdom in these matters. Where someone commits a tortious act. he at least will be liable for the consequences; whether others are liable also depends on the circumstances. Here, as the facts make plain and as Cresswell J specifically found, “all the ingredients of the tort of deceit are made out. against. Mr Mehra (and Oakprime)”. In other words SCB have proved all that is required to make Mr Mehra — and through bim Oakprime — liable in deceit, That being so, there is no conceiv- able basis upon whieh Mr Mehra should not indeed be held liable for the loss that SCB. suffered as a result of his deceit. If he had been a mere employee of Oakprime and had done the same things and written the same letters on belalf of the company in that capacity, it could never have been suggested that Mr Mehra was not personally liable for fraudulent acts, His status as a director when he executed the fraud cannot invest im with immunity. [41] The Court of Appeal sought support for their view that Mr Mehra should not be held personally liable in the speech of Lord Steyn in Williams v Natural Life Health Foods Ltd [1998] 2 All ER $77 at 581-582, [1998] 1 WLR 830 at 834-835. In truth it provides no such support. The issue in that case related to the personal liability of director for a misleading projection, pre pared in large part by him and issued by the company, a8 to the profits which the plain- tiffs might earn by opening a health food shop under a franchise. Lord Steyn, with whom the otber members of the House con- curred, sai “But in order to establish personal Iti ity under the principle of Hedley Byrne, which requires the existence of a special relationship betwen plaintiff and ortfea sor, it is n0¢ sufficient that there should have been a special relationship with the principal. There must have been an assumption of responsibility such as to exeate a special relationship with the director_or employee. himself.” (See [1998] 2. AIL ER $77 at $82. (19981 1 WLR $30 a $35.) Since the plaintiffs had failed to show a special relationship with the director himself, the House held that he was not liable. Lord Steyn was dealing with the tort of negligence where a claimant must estab- h that the defendant owed him a duty of cate. There is no such requirement in the case of deceit. Liability for deceit isso self- evident that we do not consider it as result- ing from a breach of duty (see Tony Weir ort Law (2002) at p30). Mr Mehra set out by his fraudulent acts to make SCB pay under the letter of credit. He succeeded. He is accordingly personally liable for the toss which he thereby caused them.* Comment 1 Both Lords Hoffmann and Rodger deliv- ered clear and powerful speeches re: ing a claim by the director that he was not liable for deceit as he had acted on behalf of the company. Reliance had been placed on Williams v Natural Life Health Foodssort ord alae 82, hit bat fa re the vod ith liv- sist not half wed rods Corporate Personality and the Veil of Incorporation 20 Ltd (1998] 1 WLR 830 (see below), in which it was held that a director would only be liable for a negligent misstatement where he had assumed a personal respon- sibility. However, in the instant case their Lordships stated that that reasoning does not apply in relation to liability for fraud. Also, in Williais, the director was being sued for the company’s tort whereas here Mehra was being sued for his own tort — the tort of deceit. 2. This is a sensible decision and should come as no surprise. As Lord Hoffmann pointed out, ‘No one can escape liability for his fraud by saying “I wish to make it clear that I am committing this fraud on bchalf of someone else and I am not to be personally liable™.’ The result is that direc- tors are now open to greater personal lia- bility and that Williams was nota green light for directors to escape liability in all cases for acts done on behalf of their company. Trustor AB v Smallbone (2001) 2 BCLC 436 Chancery Division (Sir Andrew Morritt V-C) + Lifting the veil of incorporation where the company is a facade concealing the true facts Facts Smallbone was the managing director of Trustor AB, a company incorporated in Sweden. In 1997 £39 million was paid out of fone of Trustor’s bank accounts om the signi tories of Smalibone and another director. Without reference to Trustor or its other direc tors. Introcom (Intemational) Ltd, a company owned and controlled by Smallbone, received £20 million of this money, out of which it paid £426,439 to Smallbone. In earlier proc ings, summary judgment had been granted against Introcom for the £20 million and also against Smallbone in respect of the amount he had received, on the hasis that this was a breach of his duty as a director. In these pro- ceedings, Trustor brought a fresh application for summary judgment against Smallbone. ‘They argued that he was jointly and severally liable with Introcom for the full amount of £20, nillion, This involved an argument that it was appropriate to pierce the corporate veil and to treat the receipt of the £20 million by Introcom as receipt by Smallbone. Held It was appropriate to pierce the veil of incor- poration and summary judgment for £20 million against Smailbone was granted Introcom was a device or facade concealing. the true facts. Sir Andrew Morritt V-C: “{14] Counsel for Trustor submitted that the circumstances were such as to warrant the court “piercing the corporate veil” and recognising the receipt by Introcom as the receipt by Mr Smallbone, He suggested that the authorities justified such a coun in three, potentially overlapping, categories, namely (1) where the company was shows to be a fagade or sham with no unconnected third parry involved, (2) where the company wes involved in some impropriety and (3) where it is necessary to do so in the interests of justice and no unconnected third party is involved. | was referred to Gilford Motor Co Lid v Horne [1933] Ch 935, [1933] All ER Rep 109, Jones v Lipman |1962] 1 All ER 442, [1962] | WLR $32, Woolfson v Strathclyde Regional Council 1978 SC (HL) 90, Re a Company [1985] BCLC 333, Adams v Cape Industries ple [1991] | All ER 929, [1990] Ch 433, Yukone Line Lid of Korea v Rendsburg Investments Corp of Liberia, The Rialto (No 2) (1998) 4 AILER 82, [1998] | WLR 294, Ord v Belhaven Pubs Ltd |1998] BCC 607 and Mubarak v Mubarak (2000) Times 30 November [15] Counsel suggested that the facts, as found by Rimer J. brought this case within each of the three categories. He pointed out that Introcom, a company incorporated in Gibralter, has only nominee directors and is controlled by a Liechtenstein Anstalt of which Mr Smallbone is a beneficiary. He30 Company Law’. relied on the findings of Rimer J that Antrocom acted on the instructions of Mr ‘Smallbone, that. Mr Smallbone. was its directing mind and will and that Introcom had no independent business, thisd-party directors, creditors or shareholders. [16] Me Smallbone, who appeared in person, told me thet there was a sensible jus- lification for the payment of ‘Trustor's, money to Intracom. He explained that Introcom had been formed in connection with an earlier scheme, having no connec- tion with Trustor, as a vehicle for his rem- eration. He contended that Introcom was nota sham, device or fagade but a genuine company having its own Separate existence. He submitted that the fact that Introcom was controlled by him was well known to the other dicectors of Trustor. He conterded that there was no finding or evidence of impro- priety sufficient to justify the order sought by Thustor.” His Lordship then referred to some principles relating to the knowing receipt of trust prop- erty and continued: *{20] | should also refer to some of the cases relied on by counsel for Trustor. In Gilford Motor Co Lid y Horne (1933] Ch 935, {1933] All ER Rep 109 an individual bound by a non-solicitation covenant after the ter- rmination of his employment set up in busi ness through a limited company. The indi- vidual was held to be in breach of coveriant, notwithstanding the interposition of the ‘company, because the company was formed as the device, stratagem or mask to ‘the effective carrying on of a business of the individual (see [1933] Ch 935 at 956, 965, 969, [1933] All ER Rep 109 at 114, 119. 121). Ineach of the passages to which | have referred it was made plain that the conclu sion was one of fact. In Jones v Lipman [1962] | All ER 442, [1962] 1 WLR 832 an individual had contracted to sell land. Wishing to avoid his lability he transferred the land to a company he had acquired for the purpose. A decree of specific pertor- mance was made against both the individ- uual and the company on two grounds. The first was that the individual had sufficient control of the company to compel it to perform the contract. The second, follow- ing the principle applied in the Gilford Meror case, Was that the company was the ‘creature of the first defendant, ‘a device and 2 sham, a mask which he holds before his face in an attempt to avoid recognition in the eye of equity” (see [1962] | AILER 442 at 444, [1962 1 WLR $32 at 836). In Woolfson v Strathclyde Regional Council 1078 SC (HL) 90 at 96 Lord Keith of Kinke! pointed out that it was appropriate 1 pierce the corporate veil ‘only where special cit cumstances exist indicating that [the company] is a mere fagado concesling the true facis’. This principle was applied by the Court of Appeal in Adams v Cape Industries ple 1991] 1 AILER 929 at 1024, [1990} Ch 433 at 542. Adam's case was followed by the Court of Appeal in Re H (Restraint Order: Realisable Property) [1996] 2 All ER 391 which was applied by Rimer J in Gencor ACP Lid v Dalby [2000] 2. BCLC 34. These authorities plainly establish the rst proposition of counsel for Trustor I referted to in [14] above. {21] The third proposition is said to be erived from the decision of this court in Re ‘@ Company [1985] BCLC 233. Inthat case a complicated structure of foreign companies and truss was used to place the individual's assets beyond the reach of his creditors. Cumming-Bruce LJ described (at 336) the structure as a facade but (at 337-338) expressed the principle to be that the court will use its powers to pierce the corporate vell if iis necessary to achieve justice ire spective of the legal efficacy of the compo- rate siructure under consideration, The latter statement is riot consistent with the views of the Court of Appeal in Adams's case 1991] | AIER 929 at 1019, {1990} Ch 433 at 536 where Slade LI said ~{Counse} for Adams} described the theme of all these cases as being that where legal technicalities would produce injustice in cases involving members of a ‘group of companies, such technicalities ‘Should not be allowed to prevail. We do notthink that the cases relied on go nearly 485 faras this. As [counsel for Cape] sub-cto ord the and his 2 In veil ke! ree the the the ch by int All in v3 he rl be Re Vs 8) at te er ” Corporate Personality and the Veil of Incorporation 31 mitted, save in eases which turn on the wording of particular statutes or contracts, the court is net free to disregard the prin- ciple of Salomon v A Salomon & Co Lad [1897] AC 22, [1895-9] All ER Rep 33 merely because it considers that justice 0 requires, Our law, for better or worse, recognises thatthe e*eation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all tbe rights and liabilities which would normally attach o separate legal entities.” In Ord y Belhaven Pubs Lid (1998] BCC 607 at 614-615 Hobhouse LJ expressed similar reservations. It does not appear from the reports that in either of those cases the ‘court was referred to Re a Conipany [1985] BCLC 333. In those circurnsiances I con- sider that I should follow the later decisions of the Court of Appeal in Adams's case aad Ord’s case and decline to apply so broad 2 proposition as that for which counsel for Trustor contends in the third principle referred 10 in [14] above, [22] The second proposition also eppears tome 0 be too widely stated unless used in conjunction with the first. Companies are often involved in improprieties. Indeed there was some suggestion to that effect in Salomon vA Salomon & Co Lad {1897] AC 22, [1895-9] All ER Rep 33. Bul it would make undue inroads into the principle af Salomon's ease if an impropriety not linked ‘othe use of the company structure to avoid or conceal liability for that impropriety was enough: [23] In my judgment the cour is entitled 10 pierce the corporate veil” an recognise the receipt of the company as that of the individual(s) in control of iv if the company was used a8 a device or facade to comceal ihe true facts thereby avoiding or concealin any liability of those individual(s), [24] Mr Smallbone is bound by the findl- ings made by Rimer J and the Court of ‘Appeal in relation to the issues bafore them. ‘Thus itis established that Inirocom was and is controlled by Mr Smallbone, the pay menis from the Trustor account. with Barclays, Cheapside tothe account of Inirocom at Barclays. Cheapside were affected by Mr Smallbone or on his instruc tions and, in the words of Rimer J, “Inrocom was simply a vehicle Mr Smallbone used for receiving money from Trustor.” Rimer J also concluded that the payments to Introcom were unauthorised and involved an inexcusable breach by Mr Smallbone of his duty as managing director of Trustor “being payments to Mr Smallbone’s own company which was then going to and did devote itself to further unauthorised and improper dissipations of the money” [25] In my view these conclusions are such as to entitle the court t0 recognise the receipt of the money of Trusior by Initocom as the receipt by Mr Smalibone too. Inirocom was a device or facade in that it was used as the vehicle for the receipt of the money of Trustor. Its use was improper as it was the means by which Mr Smallbone committed unauthorised and inexcusable breaches of his duty asa director of Trustor. Mr Smallbone has no real prospect of suc- cessfully defending this part of the claim because he is bound by the findings of Rimer J to which I have referred,” Comment ‘The judgment of Sir Andrew Morritt pro- vides a useful overview of the lifting of the yeil principles, Counsel for Trustor had suggested that the authorities justified piercing the corporate veil in three situa tions, namely: (1) where the company was shown to be a facade or sham with no unconnected third party involved: (2) ‘where the company was involved in some impropriety: and (3) where itis necessary to doso in the interests of justice. The court felt that the authorities ‘plainly establish’ the first category. Classic company law eases involving a fagade or sham, such as Gilford Motor Co Lid v Horne 1933] All ER Rep 109 and Jones v Lipman [1962] 1 All ER 442, were referred to as well as more recent eases such as Re H (Restrain Order: Realisable Property) {1996] 2 All32 Company Law ‘ ER 929 and Gencor v ACP Lid v Dalby [2000] 2 BCLC 734. = 2. In deciding that Introcom was ¢ facade, the court was influenced by the fact that Introcom was incorporated in Gibralter, had only nominee directors and was con- trolled by a Liechtenstein trust of which Smallbone was a beneficiary. In the earlier proceedings it was also found that Introcom acted on the instructions of Smallbone, that he was its directing mind and will, and that it had no independent business, third-party directors, creditors or shareholders. 3. The second proposition was rejected. His Lordship stated that this would make undue inroads into the Salomon principle if impropriety on its own, noi linked w the corporate structure to avoid or conceal lia- bility, was enough to pierce the veil. 4. Perhaps the most important aspect of this case is that part of the decision dealing with the third proposition, lifting the veil in the interests of justice, It has been sug- gested in some first instance decisions that the veil can be lifted if justice demands it: see Re a Company [1985] BCLC 333. This was rejected by the Court of Appeal in the leading case on lifting the veil, namely, Adams v Cape Industries ple (1991) 1 All ER 929, which wes applied in Trustor, AS a result of the decision in Trustor, itis now surely unarguable that the veil can be lifted merely because justice demands it. Williams and Another v Natural Life Health Foods Ltd and Another [1998] BCC 428 House of Lords (Lords Goff of Chieveley, Steyn Hoffmann, Clyde and Hutton) + Alirector was not personally liable for a tort commitied by his company Facts ‘The plaintiffs entered into a franchise agree- ment with the defendant company in respect of ahealth food shop. They were induced to doo by the negligent misrepresentations con. tained in the defendant’s brochure relating to the financial projections of the shop. The brochure made it clear that the company’s expertise was derived from a Mr Mistlin, its ‘managing director, who owned and controlled the company. He also helped prepare the brochure which described him as heading the company team of advisers. The plaintiffs, however, did not deal personally with Mistlin, but with other employees. When the company went into liquidation the plaintiffs sued ‘Misilin personally. The Court of Appeal held that the terms of the brochure showed that Mistlin had assumed personal responsibility to the plaintifis for the giving of the negligent advice contained in the company’s brochure, Mistlin appealed to the House of Lords Held The appeal was allowed. The terms of the brochure were insufficient to amount to aa assumption of personal liability by Mistlin for the company's negligence. Lord Steyn: ‘Mr Mistiin owned and controlled the company, The company held itself out as having the expertise to provide reliable advice to franchisees. The brochure made clear that this expertise derived from Mr Mistlin’s experience in the operation of the Salisbury shop. In my view these circum stances were insufficient to make Mr Mistlin personally liable to the respondents, Stripped to essentials the reasons of Langley J. the reasons of majority in the Court of Appeal and the arguments of counsel for the respondents can be considered under wo headings, First, tis said that the terms of the brochure, and in particular its descrip- tion ofthe role of Mr Mistin, are sufficient to amount to an assumption of responsibility by Mr Mistlin. In his dissenting judgment SirPatrick Russel rightly pointed out that in 4 small one-man company “the managing director will almost inevitably be the one possessed of qualities essential to the func tioning of the company”: [1997] BCC 605 at‘74 Gupreme Court Backs F. Guzpan v. Oownen. or 1.1, Bouoay (Ghulam Hasan J.) A.LBe » early six months of imprisonment in the inter- vening period, that he is a young man and hhas lost his job, In the circumstances we consider that it is not necessary to send him back to jail. The result, therefore, appeal is dismissed subject 10 the modification of sentence of imprisonment. We reduce the sentence of imprisonment to the period already undergone. The sentence of fine stands, VRE Appeal dismissed, (8) ALR, 1955 8, ©. 74 (Vol, 42, ON. 18) (Prom Bombay: ALR, 1959 Bom. 1) 28th October, 1954, MAHAJAN ©. J, 8. RB, DAS, GHULAM HASAN, BEAGWATI AND VENKATARAMA AYYAR JJ, Mra, Bacha F. Guzdar, Bombay, Appellant v. Commlssloner of Income Tax, Bombay, Respon- ent, Civil Appeal No. 104 of 30st. (a) Income ax Act (1922), 8 2(1)(4) — Agricultural income —~ Exemption trom tax — Polley and objeot of Act. ‘The policy of the Act as gathered from the various sub-clauses of section 2(1) ap- bears to be to exempt agricultural income from the purview of Income Tax Ach ‘The object appears to be not to subject to tax either the actual tiller of the soll or any other person getting land cultivated by others for dorlving beneftt therefrom; but to say thai the Denent intended to be con- ferred upon this class of persons should ex- ‘tend to those into whosetoaver hands that revenue falls, however remote the receiver of Such revenue may be is hardly warranted. ‘ Pare 8) Anno: I. T. Act, 8. 28, 2, 4b) Income ax Act (1922), Ss, 6(v), 4(3) (vill) and 2 (1) a) — Shareholder In Tea Com- -baby — Dividend income — Exemption on div Mend as agricultural income cannot be claimed, Agricultural income as deaned in 5. 2(1) () ts intended to refer to the revenue re- Celved by direct essociation with the land Which is uted for agricultural purposes and hot by indirectly extending 11 to cases where that revenue or part thereof changes hands either by way of distribution of dividends or otherwise. In fact and truth dividend 1s de- rived from the investment made la the sheres of the company and the foundation of tt Tests on the contractual reletions between the company and tho shareholder, Dividend is not derived by @ shareholder by his direct “relationship with the land. Hence, even that the though 40 per cent. of che inecme of @ Tea, Company is taxed ax income from the manu facture end sale of tea and 60 per cent. of such income ts exempt tyom tox as agricul Wural income by virtue of Rule 24 of the In come Tax Rules, still the dividend Income recelved by the shareholder 1a respect of the shares held by her in the ssid Tes Com any cannot, to the extent of 60 per cent, be claimed as agricultural income ia her hands and therefore ‘pro tanto’ exempt from fox. AIR 1949 PO 1; AIR 1940 YO 10 and AIR 1985 FO 13, Rel. on; ATR 1953 Bom 1, Atirm- ed, (Para 6) Anno; IT. Act, 8.88. 6; 8. 48.28: 8 9 Na. (0) Companies Act (1918), S, 192 — Posltion of Shareholder with respect to company's assets, ‘That a share-noider acquires & right ,to Partictpate in the profits of the company nay bbe readily conceded but It ts not possible to Sccept the contention that the shareholder Sequires any Interest in the assets of the company, A share-holder hes not got a right in the property of the company. ‘There nothing 1n the Indien Law to.warrant the assumption thet a shueholcer who puys shares buys any interest in the property of the company which is a jurisiie person en- tirely distinet from the shareholders, ‘The true portion of @ shareholder is that on buying shares an investor becomes entitled to participate in the profits of.the company in which he holds the shares {f and when the company declares, subject to. the articles of Assotlgtion, that the profits or eny por- tion thereof should be distrituted by way of dividends among the shareholders He has undoudtedly a fusther right to pariictpate in the assets of the company which would be left over after winding up but not in the asses as & whole. (1924) § Tax Cas 704 (110), Expl; AIR 1951 60 41 (64, 669, Foll. (ora 1) (4) Compantes Act (1013), Sch. 1, ‘Table A, Reg. 65 — Effective source of alvidend — AIR 1953 Bom 1 (Paras 8 and 14), Disapproved. ‘Tho view that unill e dividend is declared ‘there is no right in a share-hclder to partie eipate in the profits and that the declaration of dividend by the company {9 the eftec:ive tourco of the dividend which 1s subject to tax cannoy de accepted. ‘The declaration of dividend is certainly not the souree of the Brofit, The right to pertielpation in the pro- fito exisig independently of sny dectaration by the company with the only difference that the enjoyment of protita Is nostponed. until dividends ars declared, AIR 1959 Bom, sen partner Partne cons. i erehip pendtet Bich 1 whieh distinct Ob 2% (t) co cultural of, Engi sities « heealy the la the tr sncome aan cases ca) ase @) wit so) ©) as @) wa (Po) (vit (Po) @) 7% eo) @ wx o Me, é (esses F der Nor Tants; % India, ¢ snstruete The Juc enuiat This under th QT the Hig stated rae ing «ALR, ta Te e manu- cent, of agricul: the In. Income pect of ‘en Come er cent, inher pt from and ATR amr Para 8) 38, 8.2 rosttion of 1 assets ight to any may ssible to ‘holder of the a right Phere Ss fant the perty of ‘son en- 8. The that on entitled company @ when Articles por way of He has pate tn would + in the ve (710), >- Pera 7) Table A, a— AR ved, > declared, © partl- aration effective fect te ation of of the lration sstponed 4988 1 (Peres 8 and 14), Disapproved. (Pare 8) Anno: Comp. Act, Sch, 1, Table A, Reg. 08 NL (2) Companies Act (182), 8. 2(t), (2) — ‘Share-holder of company and partner of part- nership firm — Positions of — (Partnership Act (1922), 8. 4) ‘The argument thst the position of snare holders in a company is analogous to that of partners ‘inter se’ is wholly inaccurate, Partnership is merely an association of per sons for carrying on the business of par nership and in law the firm name 1s a com- pondious method of describing the partners. Buch Is, however, not the case of company which stands ms & separate Juriotic entity distinct from the shareholders, (1901) 1 Oh 270, Ret, (Pere 9) (f) Companies Act (1918), 8, 2(1) (a) — Agr cultural income — English decislons on meaning ot, English decisions resting upon the pecalin~ rities of the English Income Tax Law can hardly be @ safe gulde in determining upon the language of the Indian Income Tax Act the true meaning of the word ‘agricultural snceme’. (Para 11) Anno: LT. Ach 8 1N. 2 CASES REFERRED Paras (A) (1924) 8 Tax Cas 704: 1024 SO 450 1 ¢B) (V3) AIR 1981 SO 4t: 108) SCR 86 (so 1 ject_ ap, r the ac+ son gett. ing bene it intend. persons| er hands| receiver ranted, on the y Lord id Reve- 04 at p. rst place concern, 4} ¥ 4985 yin the future. That a sharcholder acquires a {right to participate in the profits of the com- pany may be readily conceded but itis not pos- lsible to accept the contention that the share- Prolder acquires any interest in the assis of ithe cbmpany. The use of the word ‘assets’ in the passage quoted above cannot be exploited to warrant the inference that a shareholder, on investing money in the purchase of shares, be- comes entitled to the assets of the company and has any share in the property of the com- pany. A shareholder has got no interest in the pro- pecty of the company though he has undoub- tedly a right to participate in the profits if and whea the company decides to divide them, The interest of a shareholder ‘vis-a-vis’ the company was explained in the ‘Sholapur Mills Case? —‘Charanjit Lal v. Union of India’, AIR. 1951 SC 41 at pp. 54, 55 (B). That judgment nega. tives the position taken up on behalf of the appellant that a shareholder has got a right Tis tae propey. ot the company. 1 i Geo tus the shareholders of the company have the sole determining voice in administering the affairs ‘of the company and arc entitled, as provided by the Articles of Association, to declare that dividends should be disiributed out of the pro- fits of the company to the shareholders but the interest of the shareholder either individually ‘9¢ collectively does not amount to more than a right to participate in the profits of the com- pany. The company is a juristic person and is dis- tinct from the shareholders. It is the company which owns the property and not the share- holders. The dividend is a share of the profits declared by the company as liable to be distri- buted among the shareholders. Reliance is plac- ed on behalf of the appellant on a passage in Buckley's Companies Act (12th Ed., page 894) where the etymological meaning of dividend is given as dividendum, the total divisible sum but in its ordinary sense it means the sum paid and received as the quotient forming the share of the divisible suin payable to the recipient, This statement does not justify the contention, that shareholders are owners of a divisible sum or that they are owners of the property of the company. ‘The proper approach to the solution of the question is to concentrate on the plain words of the definition of agricuttural income which connects in no uncertain language revenue with Bacra F. Guznar vy. Couwn. or IT, Bomsar (Ghulam Hasan J.) Supreme Court 17 — the land from which it directly springs and a stray observation in a case which has no bear- ing upon the present question does not advance the solution of the question, There is nothing} in the Indian law to warrant the assumption| that a shareholder who buys shares buys any| interest in the property of the company which| is a juristic person entirely distinct from the! shareholders. The true position of a shareholder that on) buying shares an investor becomes entitled to participate in the profits of the company in| which he holds the shares if and when the com, pany declares, subject to the Articles of Associa, tion. that the profits or any portion thereo! should be distributed by way of dividends! among the shareholders. He has undoubtedly| ‘a further right to participate in ‘the assets of| the company which would be left over after| winding up’ but not in the assets as a whole! as Lord Anderson puts it. (8) The High Court expressed the view that) until a dividend is declared there is no right in a shareholder to participate in the profits and| according to them the declaration of dividend] by the company is the effective source of the| dividend which is subject to tax. This state-| ment of the law we are unable to accept. In- deed the learned Attorney-General conceded that he was not prepared to subscribe to that proposition. The declaration of dividend is cers tainly not the source of the profit. The right! to participation in the profits exists indepen-| denily of any declaration by the company with the only difference that the enjoyment of profits! is postponed until dividends are declared. (9) It was argued that the position of share-, holders in a company is analogous to that partners ‘inter se.’ This analogy is wholly inac+.. curate. Partnership is merely an association o! persons for carrying on the business of partner-| ship and in law the firm name is a compen. | dious method of describing the partners. Such] fs, however, not the case of a company wisi] stands as a separate juristic entity distinct from| the shareholders. In Halsbury's Laws ofl England, Vol. 6 Grd Ed), page 234, the law regarding the attributes of shares is thus stated: “A share is a right to 2 specified amount of | the share capital of a company carrying with it certain rights and liabilities while the com pany is a going concern ang in its winding up. The shares or other intet¥st of any mem- ‘ber in a company are personal estate trans+78 Supreme Court Baows ¥. Gozpan y. Couns. or I..T,, Bownay (Ghulem Hason J.) Bel. Re ferable in the manner provided by its articles, and are not of the nature of real estate”, (10) In — ‘Borland’s Trustes v. Steel Bros. & Co, Lid.', 1901-1 Ch 279 (C), Farwell J. held that are in & company cannot properly be likened to 8 sum of moncy settled upon and subject to executory limitations to arise in the future} it is rather to be regarded as the interest of the shareholder in the company, measured, for the purposes of liability and dividend, by a sum of money. ai It was suggested that the dividend arises out Of the profits accruing from land and is im- pressed with the same character as the profits and that it does not change its character merely because of the incident that it reaches the bands of the shareholder, ‘This argument runs counter to the definition of agricultural income which emphasizes the ~ necessity of the recipient of income having a direct and an immediate rather than an indirect _and remote relation with land. To accept this ‘argument will be tantamount to saying that the ~sreditor recovering interest on money debt duc from the ‘agriculturist who pays out of the pro- duce of the land is equally entitled to the exem- ption. In faimess to Mr. Kola it must, howe ever, be stated that the contention was not so broadly put but thore is no reason why ono should stop at a particular stage and not pure sue the analogy to its logical limits, (11) English decisions resting upon the pecu- Niatities of the English Income-Tax Lew can Jhardly be a safe guide in determining upon the nguage of the Indian Income-Tax Act the Iue meaning of the word ‘agricultural income’. A few cases of the Privy Council decided with reference to the provisions of the Indian In- —cometax Act, however, deserve notice, The first case, viz., ‘Commr. of Income-tax, B. & O. ~¥, Kamakhaya Narayan Singh’, AIR 1949 PC 1 (D), dealt with the question whether interest on arrears of rent payable in respect of land used for agricultural purposes is egricultural income and therefore exempt from income-tax. Js was held that it was neither rent nor revenue derived from land within the meaning of section ~2{1) of the Income-Tax Act, Lord Uthwatt who =elivered the judgment of the Privy Council ‘used the following piquant language in com- ‘ing to that conclusion: “The ward ‘derived’ is not a term of art. Its —‘use in the definition indeed demands an en- quiry into geneology of the product. But the caguiry should stop us soon as the effective source is discovered, In the geneological tree of the interest land indecd appears in the second degree, but the inmiediate and eifec- tive source is rent, which has sulfered the accident of non-payment, And rent is not land within the meaning of definition.” The second case, viz., — ‘Premier Construc- tion Co, Ltd. v. Commr. of Income-Tax, Bome bey’, AIR 1949 PC 20 (E), doalt with the nature of the commission of a managing agent of the company a part of whose income was agricul- tural income. ‘The assesser claimed exemption from tax on the ground that his remuneration at 10 per cent, of the profits was calculated with reference to the income of the company part of which was agricultural income. It was aeld that the assessee received no agricultural in- come as defined by the Act but that he received @ remuneration under a contract for personal service calculated on the amount of profits earn- ed by the employer. payable not in specie out of any item of such profits, but out of any moneys of the employer available for the put- pose, aad that the remuneration therefore was not agricultural income and was not exempt from tax. Sir John Beaumont, in the above case observed: “In their Lordships’ view the principle to be derived from a consideration of the térms of Income-Tax Act and the authorities referr- ed to is that where an assessee receives in- come, act itself of a character to fall within the definition of agricultural income contain. ed in the Act, such income docs not assume the character of agricultural income by reason of the source from which it is derived, or the method by which it is calculated’ In the third case viz., ‘Gopal Saran Narain Singh v, Commr, of Income-tax, B. & 0’, AIR 1935 PC 143 (F), an annual payment for life to the assessee was not held to be agricultural income and therefore not exempt from tax where the annuity arose out of a transfer made by the assessee of o portion of his estate for discharging his debts and for obtaining an ado quate income for his life it being held that it Was not rent or revenue derived from land but money paid under a contract imposing personal liability on the covenantor the discharge of which was secured by a charge on lend, But re- fiance wes placed upon another judgment of the Privy Council in — ‘Comms, of Income- 4} 4955 1 tax Ba 172:(G) mortgag exempt they we; Lord M tions of those se altogeth: or by w observat facts of of usuft profits d plication was tha land dir (2) 4 English on tho p English the part 3) 1 tended t agricule. visions + proviso tion con the who! is exclu come. press an conclusi: discussic We accc VSB. (Be 6= | 4968 Txp1a Usrrep Mints y. Gosnan, or BB, . (Venkatarama Ayyar Supreme Court 19 Sut the fective cal tee. in the | effec- ‘ed tho is not nstruce » Bom- nature of the agricul- mption \eration ed with ay part as held aral_ ine eoeived »ersonal ts earns xie out of any he pute ore was exempt ve case le to be 2 terms s referr= ives ine | within contains assume me by derived, ated”, icultural om tax made state for an ade- 4 that it land but personel rarge of + tax B. & O. v. Kameshwar Singh’, AIR 1935 PC 172-(G). That was a case of usufructuary mottgagee the profits received by whom were exempt from income-trx on the ground that they were agricultural income in his hands, Lord Macmillan, after referring to certain sec- tions of the Act, observed that “the result of those sections is to exclude agricultural income altogether from the scope of the Act howosever or by whomscever it may be received.” These observations must be held to be confined to the facts of that particular case which was a caso of usufructuary mortgagee who had received Profits direcily from the land. The obvious im- plication of the words used by Lord Macmillan was that whosoever receives proft {rom the Jand directly is entitled to the exemption, (12) Reference was also made to. some English decisions but they have no bearing up- ‘on the present case as they were founded on the English Income-tax Law and the provisions of the particular statute. (13) The learned Attorney-General also con- tended that the conclusion that dividend is not agricultural income also follows from the pro- visions of section 16, sub-section (2) and the proviso to the Act. According to him, this sec tion compels the assessee to show in his return the whole dividend including the portion which is excluded on the ground of agriculturs! come. We do not consider it necessary to ex press any opinion upon this contention as our conclusion reached as a result of the foregoing, discussion is sulficient to dispose of the appeal. We accordingly dismiss che appeal with costs. VSB. Appeal dismissed. (8) ALB, 1955 8, ©, 19 (Vol. 42, C2. 19) | Grom Bombay: A. TR, 1053 Bom 88) Bath October, 1954. MAHAJAN C. J, 5. R, DAS, GHULAM HASAN, BHAGWATI AND VENKATARAMA AY¥YAR JJ. India United Mills Lid. Appellant y. Commr, GT Excess Profits Tax, Bombay, Respondent, lvl Appeal No, 180 of 1053, Rxoess Profits Tax Act (1910), Ss, 18 and 26 (3)° = The word ‘alscovers’ In 8. 15 may relate 10 fnots audsequent to chargeable accounting perlod — Rellef granted under 8. 26 (3) — Asterseo uilllsing buildings, plants or machinery In busl- ness after termination of war — Excess Profits fs finder 31K on the fects and elreumstances on which asseasment hed been made or rellet granted and 1 not mited to events which were In existence during the chargeable accounting period and when the Excess Profits Tax Offcer finds that an assesses to whom rellet had bean granted under 6, 26 (3) has utilised the bulld- ings, plant or machinery in business after ‘the terminstion of the war, he is entitled to proceed under 8, 15 of the Act. ATR 1983 Bom 88, Afirmed (Paras #, 9, 1) OASES REFERRED: Paras (A) (1936) 1936-2 KB 603; 20 Tox Cas 288 14 (B)¢ 1922) 19321 KB 971; 16 Tax Cas 200 7 11, 13, 14 (©) (098) 1990-2 6B $03; 20 Tax Ces 285 12, 13 (D) 937) 21 Tax Cas 252 a (B) (1934) 19041 KB 624; 18 Tax Cas 7114 CP) (1946) 1948. All BR tok: 30 Tax Cas 4s 4 (@) (1930) 1636-2 KB 993; 109 LKB 6m 1k Messrs. R. J. Kolah and Rajinder Narain, Ad- voeate for Appellant; Mr. M. ©, Setalvad, Attomey- General of Indie, (M/s. Q. N. dosnt and P. G, Gokhale, Advocates with nim), for Respondent The Judgment of the Court was delivered by YENKATARAMA AYYAR J. This is en appeat from the judgment of the ‘High Court of Bombay on a reference under— Section 66(1) of the Indian Income-tax Act, and the question for determination is as to the validity of certain re-assessments made under Section 15 of the Excess Profits Tax Act, which will hereafter be referred to as the Act. @) In proceedings for assessment of excess profits for the year 1941, the appellant Com- pany applied for relief under S. 26(3) of the Act, Which so far as is material for the purpose of this appeal. runs as follows : “If on an applicetion made to it through the_ Excess Profits’ Tax Officer the Central Board of Revenue is satisfied that the com, putation in accordance with the provisions of Schedule I of the profits of 2 business uring any chargeable accounting period would be inequitable, owing to any of the following circumstances, namely— (©) the provisions of buildings, plant or machinery which will not be required for the purposes of the business after the termis uation of the present hostilities * *rE (ria 406 SUPREME COURT CASES (1990) 48cC (1990) 4 Supreme Court Cases 406 (BEFORE SABYASACHI MUKHARSI, CI. AND B.C. RAY, MH. KANtA, KN. SAIKIA AND S.C. AGRAWAL, JJ.) Civil Appeal No. 2368 of 1986" ASHOKA MARKETING LTD. AND ANOTHER - Appellants; Versus PUNJAB NATIONAL BANK AND OTHERS. » Respondents. And Civil Appeal No. 2369 of 1986 SAHU JAIN SERVICES LTD, AND ANOTHER Appeltants; Versus PUNJAB NATIONAL BANK AND OTHERS Respondents. - And Civil Appeal No. 3725 of 1986 KB. PARSAL + Appellant; * Versus UNION OF INDIA AND OTHERS + Respondents. And ‘Writ Petition (Civil) No. 864 of 1985 Mis. BENNETT COLEMAN AND CO, LTD. AND ANOTHER Petitioners; Versus LIFE INSURANCE CORPORATION OF INDIA AND OTHERS Respondents. Civil Appeal Nos. 2368, 2369 and 3725 of 1986 and Writ Petition (Civil) No. 864 of 1985, decided on August 7, 1990 Public Premises (Eviction of Unauthorised Occupants) Act, 1971 — Held, overrides Delhi Rent Control Act, 1958 where leased premises covered by both the enactments — Both are Acts of Parliament and fall under Concurrent List — Hence to determine as to which Act will apply, the statutory rule of construc- tion viz. later law abrogates earlier contrary law will apply — Rule generalia specialibus non derogant will not apply as both the Acts are special enactments —— Having regard to the purpose, policy and legislative intent of the two special enactments also, the L97L Act will prevail over the 1958 Act — Constitution of India, Article 246(4) and Schedule VII List Il] Entries 6, 7, 13, 32 and 46 Statute Law — Where two enactments of the same legislature fall under the same legislative list, the question as to which enactment will override the other in case of conflict of laws will have to be determined on the basis of prin- + From the Judement and Order dated May 30, 1986 of the Delhi High Court in GW. ciples of derogant — Wher tent as will prev Held : On tit car within u Cantonm poration panies or the Publi posse hash. facie fall The List III Act has b in exereis Premises premises Central ¢ respect 1 to the var Act is cor Delhi Re same legi the matte Jain tak 1SCR SCR 4 (980) Accoun Saiyad. LS. Nair Inst Premises considere laws mad tion whic cor teraria suuject derogant ( that wher which spe Act, itis | the speci390) 48. ANIA, Appellants; spondents. Appellants; ondents, Appellant; espondents, Petitioners; espondents, (Cwil) No. o71 — Held, red by both current List of construc- le generalia enactments two special stitution of ad 46 ve fall under override the vasis of prin- Court in CW. ASHOKA MARKETING LTD. ¥. PNB. 407 ciples of statutory interpretation — Rules of ‘generalia specialibus non derogant’ and ‘leges posteriores priores conterarias abrogant’ — Applicability — Where both the Acts are special enactments, purpose, policy and legislative intent as conveyed by the language should be examined to determine which one will prevail — Interpretation of Statutes — Maxims Held: On a comparison of the Public Premises Act with the Delhi Rent Control 4 tit can be said that certain premises, viz. building or parts of buildings lying within the limits of the New Delhi Municipal Committee and the Delhi Cantonment Board and in urban areas within the limits of the Municipal Cor- poration of Delhi, which belong to or are taken on lease by any of the com- panies or statutory bodies mentioned in clauses (2) and (3) of Section 2(¢) of the Public Premises Act and which are in occupation of a person who obtained possesrirm of the said premises as a tenant and whose tenancy has expired or has boci verminated but who is continuing in occupation of the same, would ex- facie fall within the purview of both the enactments, ara 41) ‘The rent control legistations fall within the ambit of Entries 6,7 and 13 of List ITI of the Seventh Schedule to the Constitution, The Delhi Rent Control Act has been enacted by Parliament in relation to the Union Territory of Delhi in exercise of the legislative power conferred under Article'246(4). The Public Premises Act insofar as it relates to eviction of unauthorised occupants from premises belonging to or taken on lease or requisitioned by or on behalf of the Central Government would fall within Entry 32 of List I being a law with Tespect t0 a property of the Union. But in relation to the properties belonging to the various legal entities mentioned in clauses (2) and (3) of Section 2(e), the Act is covered by Entries 6, 7 and 46 of List IIT. Thus both the statutes viz. the Delhi Rent Control Act and the Public Premises Act have heen enacted by the same legislature, Parliament, in exercise of the legislative powers in respect of the matters enumerated in the Concurrent List. (Paras 46, 47, 48 and 49) Jain Ink Manufacturing Co. v. Life Insurance Corpn. of India, (1988) 4 SCC 435: (1981) 1 SCR $98; Indie Bhushan Bose v, Rama Sundari Devi, (196%) 2 SCC 289: (1970) 1 SCR 443; Jal Singh Jairam Tyagi v. Mamanchand Ratilal Agarwal, (1980) 3 SCC 162: (1980) 3 SCR 224, relied on Accountant and Secretarial Services Pu. Ltd. v. Union of India, (1988) 4 SCC 324; Saiyada Mossarratv. Hindustan Sieel Li, (1989) 1 SCC 272, reconciled LS. Nair v. Hindusten Steel Lid, ATR 1980 MP 106, approved In such a situation the questfon as to whether the provisions of the Public Premises Act overtide the provisions of the Rent Control Act will have to be considered in the light of the principles of statutory interpretation applicable to Jaws made by the same legislature. One such principle of statutory interpreta- tion which is applied is contained in the latin maxim : leges posteriores priores coterarias abrogant (later laws abrogate earlier contrary laws). This principle is subject to the exception embodied in the maxim : generalia specialibus non derogant (a general provision does not derogate from a special one). This means that where the literal meaning of the general enactment covers a situation for which specific provision is made by another enactment contained in an earlicr Act, itis presumed that the situation is intended to continue to be dealt with by the specific provision rather than the later general one. (Paras 49 and 50) 50408 SUPREME COURT CASES (1990) 4scc Francis Benion, Staauiory inerpretation, pp. 433-34, relied on JK Conon Spinning é& Weaving Mills Co. Ltd. v. State of UP., AIR 1961 SC 1170: (1961) 3 SCR 185; ULP. State Elecwicity Board v. Hari Shankar Jain, (1978) 4 SCC 16: (1979) 1 SCR 355: 1978 SCC (L&S) 481; Life Insurance Corporation v.D.J. Bahadur, (1981)1 SCC315: (1981) 1 SCR 1083: 1981 SCC (L&S) 111, relied on ‘The Delhi Rent Control Act is the carlier enactment while the Public Premises Act is the later enactment representing the later will of the Parlia- ment. Therefore, the Public Premises Act should prevail over the Delhi Rent Control Act unless it can be said that the Public Premises Act is a general enactment, whereas the Rent Control Act is a special enactment and as such the Rent Control Act should prevail over the Public Premises Act. (Para 54) But both the enactments, namely, the Rent Control Act and the Public Premises Act, are special statutes in relation to the matters dealt with therein. Since, the Public Premises Act is a special statute and not a general enactment the exception contained in the principle that a subsequent general law cannot Gerogate from an earlier special law cannot be invoked and in accordance with the principle that the later laws abrogate earlier contrary laws, the Public Premises Act must prevail over the Delhi Rent Control Act. (Para 55) In the case of inconsistency between the provisions of two enactments, both of which. can be regarded as special in nature, the conflict nas to be resolved by reference to the purpose and policy underlying the two enactments and the clear inteadment conveyed by the language of the relevant provisions therein, (Para 61) Ram Narain v. Simla Banking and Indusirial Co. Lid. AUR 1956 SC 614: 1956 SCR 603: (1956) 25 Comp Cas 280 Kumaon Motor Owners’ Union Liv State of U.P (1946) 2SCR 121; Sarwan Singh v. Kasturi Lal, ATR 1968 SC 785: (1977) 2 SCR $21, relied on While the Rent Control Act is intended to deal with the general relationship of landlords and tenants in respect of premises other than govern- ment premises, the Public Premises Act is intended to deal with speedy recovery of possession of premises of public nature, The effect of giving over- Tiding effect to the provisions of the Public Premises Act aver the Rent Control Act, would be that buildings belonging to companies, corporations and autonomous bodies referred to in Section 2(e) of the Public Premises Act would be excluded ftom the ambit of the Rent Control Act in the same manner ‘as properties belonging to the Central Government. The reason underlying the exclusion of property belonging to the government from the ambit of the Rent Control Act, is that the government while dealing with the citizens in respect of property belonging to it would not act for its own purpose as 4 private landlord but would act in public interest. What can be said with regard to government in relation to property belonging to it can also be said with regard to companies, corporations and other statutory bodies mentioned in Section 2(e) of the Public Premises Act. Therefore, keeping in view the object and purpose underlying both the enactments, the provisions of the Public Premises Act have to be con- strued as overriding the provisions contained in the Rent Control Act in spite of the non-obstante clauses contained in Sections 14 and 22 and the provisions contained in Sections 50 and 54 of the Delhi Rent Control Act. (Paras 64, 65, 68) V. Dhanapal Chettiar v. Yesodai Ammal, (1979) 4 SCC 214: (1980) 1 SCR 334, referred ‘eo ‘The on the b banks ot buying tt the tena higher ve as comp: the prov panies ai the Publ Control with the the stan would b Dwarka 293,0 ier to thee Act, ov unautho not invo Pul tion 2(€ tions — public « Underta Co eral cha — Dift shareho 1971, S Jorispr We Held Inv ‘sharcho develop corpora Central public p Fr nationa and the power t Fight to90) 4 SCC 1 SC 1170: A SCC 16 J, Bahadur, the Public hhe Parlia- dethi Rent a general ad as such (Para 54) he Public th therein, enactment aw cannot Jance with the Public (Para 55) nactments, has to be nactments provisions (Para 61) 2421, relied ye general an govern- ith speedy iving over- nt Control ations and mises Act he manner erlying the of the Rent respect of te landlord ernment in sompanies, the Public. underlying to be con- Act in spite provisions 64, 65, 68) 334) referred ASHOKA MARKETING LTD. «. PNB 409 The scope of the provisions of the Public Premises Act cannot be cut down ‘on the basis of the apprehension that the corporations like the nationalised banks or LIC which are trading corporations and cannot be precluded from buying the property in possession of the tenants at a low price and then evicting the tenants after terminating the tenancy and selling the property at a much higher value because the value of property in possession of tenants is much less as compared to vacant property. The consequence of giving overriding effect to the provisions of the Public Premises Act is that premises belonging to com- panies and statutory bodies referred to in clauses (2) and (3) of Section 2(e) of the Public Premises Act would be exempted from the provisions of the Rent Control Act, The actions of these companies and statutory bodies while dealing with their properties under the Public Premises Act will have to be judged by the standard that they would not act as private landlords and thelr actions ‘would be informed by reason and guided by public interest. (Para 69) Pate Marfatia and Sons v. Board of Trustees ofthe Port of Borabay, (1989) 3 SCC 3, applied Tt must therefore, be held that the provisions ef the Public Premises Act, to the extent they cover premises falling within the ambit of the Rent Control Act, override the provisions of the Rent Control Act and a person in unauthorised occupation of public premises under Section 2(e) of the Act can- not invoke the protection of the Rent Control Act. (Para 70) Public Premises (Eviction of Unauthorised Occupants) Act, 1971 — Sec- tion 2(e)(2) (ii) — Public premises — Premises belonging to public corpora- tions — Held, nationalised banks are corporations within the meaning of the definition clause and hence Its premises are pubic premises — New concept of public corporations — Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970, Section 3, 7 and 8 Company Law — Corporations — Distinctive features — Kinds of — Gen- eral characteristics of public corporations — Corporation and body corporate — Difference between — New trend of public corporations without shareholders — Public Premises (Eviction of Unauthorised Occupants) Act, 1971, Section 2(¢)(2)(ll) — Penal Code, 1860, Section 21 clause twelfth — Jurisprudence ‘Words and Phrases — ‘Body Corporate’ and ‘Corporation’ — Meaning of Hel In order to constitute a corporation it is not necessary that there should be shareholders or members and in the new pattern of public corporation that has developed there arg no:shareholders or members. The nationalised bank is a corporation established by a Central Act and it is owned and controlled by the Central Government. Thus the premises belonging to a nationalised bank are public premises under Section 2(¢)(2)(i) of the Public Premises Act. (Paras 25 and 22) From Section 3 of the Banks Nationalisation Act it is evident that the nationalised banks have been established under the provisions of the said Act and the same are distinct juristic persons with perpetual succession and the power to acquire, hold and dispose of property and to contract and having the Tight to sue and be sued in their own name and further that the entire capital of Se410 SUPREME COURTCASES (1990) 4 sce the said banks is vested in the Central Government, meaning thereby, that the said banks are owned by the Central Government. The general supei intendence, direction and management of the affairs of the business of the bank. §8 vested in a Board of Directors constituted by the Central Government and the Central Government has the power to remove a person from the member- ship of the Board of Directors and in the discharge of its functions the bank is to be guided by such directions in regard to matters of policy involving public interest as the Central Government may, after consultation with the Governor of the Reserve Bank, give. This indicates that the nationalised bank has all the attributes of the new pattern of public corporations. (Paras 14, 18 and 19) ‘Tamlin v. Hannaford, (1950) 1 KB 18, followed ‘The object of enlarging the definition of ‘public premises’ in Section 2(e) of the Public Premises Act is to make available the machinery of the Aci for evicting unauthorised occupants not only from the premises belonging to the Central Government but also trom premises belonging to companies, corpora tions and statutory bodies in which the Central Government has a substantial interest. It could not be the intention of Parliament that premises belonging to public corporations whose entire paid-up capital vests in the Central Govern: ment and who are the instrumentalities of State would be excluded from the ambit of the definition of ‘public premises’. Therefore, the expression ‘corpora- tion’ in Section 2(e)(2)(i) of the Public Premises Act would include public cor- Porations of the new pattern constituted under the Central Acts wherein the ‘entire paid-up capital vests in the Central Goverament. (Para 22) Jags Singh v. M. Shaukat Ali, AIR 1953 NUC Cal 4499: 58 Cal WN 1066; Satish Chander \. Delhi Improvement Trust, AIR 1958 Punj 1: 59 Punj LR 621, Brigade Commander, Meerut Sub Area v. Ganga Prasad, AIR. 1956 All 507: 1956 All 13.251, Northern Indian Caterers Pvt. Lid. v. Siae of Punjab, ATR 1967 SC 1581: (1967) 3 SCR 399; PL. Mehra v. D.R. Kaanna, AIR 1971 Del {: 1971 Ren CR 100; Har Singh v.Military Estate Officer, (1972) 2 SCC 239: (1973) 1 SCR 515, referred to Merely because the expression ‘body corporate’ has been used in relation to the nationalised banks in Section 3(4) of the Banks Nationalisation Act and the expression ‘corporation’ has not been used, does not mean that the nationalised bank is not a corporation. The expression “body corporate’ is used in legal parlance to mean ‘a public or private corporation’. (Para 19) Black's Law Dictionary, p. 159, relied on Generally speaking, corporations are of two kinds: corporation aggregate and corporation sole. A corporation aggregate has been described as an incorporated group of co-existing persons and a corporation sole as an incorporated series of successive persons. The distinctive feature of a corpora- tion are that it has the capacity of continuous existence and succession, notwith- Standing changes in its membership and it possesses the capacity of taking, holding and conveying property, entering into contracts, suing and being sued, and exercising such other powers and privileges conferred on it by law Of Its creation just a5 a natural person may, Corporations aggregate may be public or Private. A public corporation is a corporation formed for a public purpose c.g. local government authorities. A private corporation is a corporation formed for profit c.g. a limited company, and it is usually incorporated under a statutory enactment. (Para 16) After: in England acteristics ¢ statute; it shareholder meat and P emment, re Parliament, ofa board status of a ¢ to other co by Acts of public corp: Tanlinv.F SS. Dhane Wales. scc 218 W. Friedn 36; Halse 1athedn, Oriental Be (view of Public tion 2(e) — premises — render Sec 19(1)(g),21 Held: The se confined to comimercial inclusion o Public Pres 39 and 41. commercial and 41, Th machinery serves a pu eviction of made in tl premises 1 ‘unauthoris: sitate provi occupation premises Public tion 2(g) — has enterec1990) 48CC yy, that the veral_super- sof the bank rnment and he member- the bank is Iving public © Governor « has all the |, 18 and 19) Section 2(e) the Act for aging 16 the es, corpora. substantial velonging to ral Govern d from the on ‘corpora. public cor- wherein the (Para 22) 1066; Sarish 621; Brigade 5 All 13 251; Bi: (1967) 3 0; Hari Sigh in relation on Act and fn that the ate’ is used (Para 19) 1 aggregate ibed as an sole as an a compora- 1, notwith- of taking, being sued Jaw of its ve public or urpose eg. formed for a statutory (Para 16) ASHOKA MARKETING LTD. v. PNB. 41 Alter second World War a new pattern of public corporations developed in England as an instrament of planning in a mixed economy. The general char- acteristics of such a public corporation is that it is normally created by a special statute; it has no shares and no sharcholders either private or pubiic, and its shareholder, in the symbolic sense, is the nation represented through govern- ‘ment and Parliament; the responsibility of the public corporation is to the gov- ernment, represented by the competent Minister and through the Minister 1 Parliament; the administration of the public corporation is entirely in the hands of a board which is appointed by the competent Minister, and it has the legal status of corporate body with independent legal personality. This trend spread to other countries and in India also public corporations have been constituted by Acts of Parliament, The nationalised banks and LIC are such new type of public corporations. (Para 16) Taratn v, Hannaford, (1950) 1 KB 18: (1949) 2 All ER 327, followed 5S. Dhanoa \. Municipal Corporation, Delhi, (1981) 3 SCR 864; Bank of New South Wales v. Commonwealth, (198) 16 CLR 1; RC. Cooper v. Union of India, (1970) 1 SCC 248: (1970) 3SCR $30, relied om W. Friedman, ‘The New Public Corporations and the Law, (1947) 12 Mod LR 234 - 36; Halsbury’s Lans of England, 4th edn, vol. 9, para 1201; Salmond on Jurisprudence, 12th eda., p.308, relied on Oriental Bank of Commerce v. Delhi Development Authority, (1985) 55 Com Cas 81, (view of ML. Jain, J.) overrated Public Premises (Eviction of Unauthorised Occupants) Act, 1971 — See- tion 2(e) — Public premises — Includes both residential as well as commercial premises — Inclusion of premises let out for commercial purposes will not render Section 2(e) unconstitutional — Constitution of India, Articles 14, 19(1) (g), 21 read with Articles 39 and 41 Held: ‘The scope of the definition of “public premises” in Section 2(e) cannot be confined to premises used for residential purposes only. The premises used for commercial purposes are also included within the ambit of the definition. The inclusion of the premises used for commercial purposes would not render the Public Premises Act violative of Articles 14, 19(1)(g) and 21 read with Articles 39 and 41. A person in unauthorised occupation of public premises used for ‘commercial purposes cannot invoke the Directive Principles under Articles 39 and 41, The Public Premises Act has been enacted to provide for a speedy machinery for the eviction of unauthorised occupants of public premises. It serves a public purpose, viz. making available, for use, public premises after eviction of persons in unauthorised occupation. No distinction can therefore be made in the context between premises used for residential purposes and premises used for commercial purposes in the matter of oviction of unauthorised occupants of public premises and the considerations which neces- sitate providing a speedy machinery for eviction of persons in unauthorised occupation of public premises apply equally to both the types of public premises. (Para 28) Public Premises (Eviction of Unauthorised Occupants) Act, 1971 — Sec- tion 2(g) — Unauthorised occupation — Held, covers a case where 2 person hhas entered into occupation of the public premises legally asa tenant under a =i)422 SUPREME COURTCASES (1990) 4 sec premises belonging to a nationalised bank are ‘public premises’ under Section 2(e) (2)(i) of the Public Premises Act. The question which, therefore, requires to be considered is whether a nationalised bank is 2 corporation established by or under a Central Act and is owned or con- trolled by the Central Government. 14. The nationalised banks have been established under the Banks Nationalisation Act, wherein the nationalised banks have been described 2s ‘corresponding new bank’. In sub-section (i) of Section 3 of the Banks Nationalisation Act, it has been provided that on the commencement of the said Act, there shall be constituted such corresponding new banks as are specified in the First Schedule. In sub-section (2) of Section 3, it is |sid down that the paid-up capital of every corresponding new bank con. stituted under sub-section (1) shall, until any provision is made in this behalf in any scheme made under Section 9, be equal to the paid-up capi- tal of the existing bank in relation to which it is the corresponding new bank. Sub-section (3) of Section 3 provides that the entire capital of the new bank shall stand vested in, and allotted to the Central Government, Sub-section (4) of Section 3 lays down that every corresponding new bank shall be a body corporate with perpetual succession and a common seal with power, subject to the Provisions of the said Act, to acquire, hold and dispose of property, and to contract, and may sue and be sued in its name. From the aforesaid provisions contained in Section 3 of the Banks Nationalisation Act it is evident that the nationalised banks have been established under the provisions of the said Act and the same are distinct juristie persons with perpetual succession and the power to acquire, hold and dispose of property and to contract and having the right to sue and be sued in their own name and further that the entire capital of the said banks is vested in the Central Government, meaning thereby, that the said banks are owned by the Central Government. 15, Shri Yogeshwar Prasad has pointed out that, in view of Section 3(4) of the Banks Nationalisation Act, the nationalised bank is a body forporate and not a corporation and that there is a distinction between a body corporate and a corporation inasmuch as a body corporate includes bodies, such as companies, cooperative societies, ete. which are not cor. Porations. Reliance has been placed in this regard on the decision of Delhi High Court in Oriental Bank of Commerce v, Delhi: Development Authority’. We find no substance in this contention. 16. In English law a corporation has been defined as “a body of per- sons or an office which is recognised by the law as having a personality which is distinct from the separate personalities of the members of the body or the personality of the individual holder for the time being of the office in question.” (See Halsbury’s Laws of England, ath edn., volume 9, 7 (1985) 55 Com Cas 81 (Del HC) para 1201 tion aggre described tion sole : Jurispruder are that i notwithsta of taking, and being ferred on Dhanoa v. be public « public pu ineorporat tion is ac usually inc world war rations in The gene: normally sharcholde sense, is th responsi represente liament; th hands of a has the le sonality. (: Law"), Tr other cou independe: stituted by 17. Th ration gene vations of I Trans; compa belony aceusti exceed 8 (1981)38 9 (1974) 25eee 90) 48ce es! under on which, bank isa a dor con- he Banks described he Banks 2 cement of banks as on 3, itis yank con- je in this © J-up capi- } ding new tal of the ernment, ding new 9 common uire, hold ued in its he Banks ave been distinct sire, hold > sue and F the said that the f Section is @ body vetween ag elopment dy of per- ‘onality volume 9, / ASHOKA MARKETING LTD. v. PNB. (Agrawal, J.) 423 para 1201), Generally speaking, corporations are of two kinds; corpora- tion aggregate and corporation sole. A corporation aggregate has been described as an incorporated group of co-existing persons and a corpora- tion sole as an incorporated series of successive persons (Salmond on Jurisprudence, 12th edn. p. 308). The distinctive fcature of a corporation are that it has the capacity of continuous existence and succession, notwithstanding changes in its membership and it possesses the capacity of taking, holding and conveying property, entering into contracts, suing and being sued, and exercising such other powers and privileges con- ferred on it by law of its creation just as a natural person may (see S.S. Dhanoa v. Municipal Corporation, Delhi"). Corporations aggregate may be public or private. A public corporation is a corporation formed for a public purpose e.g. local government authorities, and it is usually incorporated by a public general Act of Parliament. A private corpora- tion is a corporation formed for profit e.g. a limited company, and it is "usually incorporated under a statutory enactment. After the second world war there has been development of a new pattern of public corpo- rations in England as an instrument of planning in the mixed economy. The general characteristics of such a public corporation is that it is normally created by a special statute; it has no shares and no shareholders either private or public, and its shareholder, in the symbolic sense, is the nation represented through government and Parliament; the responsibility of the public corporation is to the government, represented by the competent Minister and through the Minister to Par- liament; the administration of the public corporation is entirely in the hands of a board which is appointed by the competent Minister, and it has the legal status of a corporate body with independent legal per- sonality. (See W. Friedman: “The New Public Corporations and the Law”). There is a similar growth of this type of public corporation in other countries. This trend is also evident in our country since independence and a nymber of such public corporations have been con- stituted by Acts of Parliament. 17. The distinction between such a public corporation and a corpo- ration generally known in law has been explained in the following obser- vations of Denning LI, as he then was : (KB pp. 22-23) “The Transport Act, 1947, brings into being the British Transport Commission, which is a statutory corporation of a kind comparatively new to English law. It has many of the qualities which belong to corporations of other kinds to which we have been accustomed. It has, for instance, defined powers which it cannot exceed; and it is directed by a group of men whose duty it is to see 8 (1981) 3.SCC-431 ; 1981 SCC (Cri) 733 : (1981) 3 SCR B64 9 (1974) 2 SCC 402 : (1975) 1 SCR 1 6424 SUPREME COURT CASES (1990) 4c that those powers are properly used. It may own property, carry on business, borrow and lend money, just as any other corporation may do, so long as it keeps within the bounds which Parliament has sct. But the significant difference in this corporation is that there are no shareholders to subscribe the capital or to have any voice in its affairs. The money which the corporation needs is not raised by the issue of shares but by borrowings and its borrowing is not secured by debentures, but is guaraniced by the Treasury. If it cannot repay, the loss falis on the Consolidated Fund of the United Kingdom; that is to say, on the taxpayer. There are no sharcholders to elect the direc- tors of to fix their remuneration. There are no profits to be made or distributed.” 18. Reference has already been made to the provisions of the Banks Nationalisation Act which show that the nationalised bank has been con- stituted as a distinct juristic person by the Act and it is owned by the Cen- tral Goverament. There are other provisions in the Banks National tion Act which show that the gencral superintedence, direction and management of the affairs of the business of the bank is vested in a Board of Directors constituted by the Central Government and the Cen- tral Government has the power to remove the person from the member- ship of the Board of Directors [Section 7(2) and 7(3)] and in the dis- charge of its functions the bank is to be guided by such directions in regerd to matters of policy involving public interest as the Central Gov- ernment may, after consultation with the Governor of the Reserve Bank, give (Section 8). This indicates that the nationalised bank has all the attributes of the new pattern of public corporation. 19. Merely because the expression ‘body corporate’ has been used in relation to the nationalised banks in Section 3(4) of the Banks Nationalisation Act and the expression ‘corporation’ has not been used, does not mean that the nationalised bank is not a corporation: The expression ‘body corporate’ is used in legal parlance to mean ‘a public or private corporation’ (Black's Law Dictionary p. 159). 20. Shri Yogeshwar Prasad has urged that in order to constitute a corporation there must exist persons, ic, members, composing it, and that this element is missing in the nationalised banks inasmuch as the Banks Nationelisation Act does not provide for any membership to these banks. This contention is without any merit because, as noticed earlier, in the new pattern of public corporations which have developed, there are no shares and no shareholders, either in public or private, and its shareholder, in the symbolic sense, is the nation represented through government and Parliament. A similar contention was raised before the High Court of Australia in the Bank of New South Wales v. Com- 10. Tamlin v. Hannaford, (1950) 1 KB 18: (1949)2 All ER 327 monweal. body cor a this cont aco sion: new Similarly corp cons its ¢ ‘ 2 indi stitu abstr artif 211 this Cou provisior Undertal corporati 22.) (i) of the legislatio; is to mak occupant ; ment but statutory interest. ' incorpor: fifty-one ment, are 9 of Parlia entire pa instrume: definitior h ‘corporat 5 include j Central 4 1 ernment, an (1948)" ; 12 (1970) ; _960) 4 SCC y carry on ration may int has set. vere are no ice in its ised by the cured by repay, the om; that is t the direc: be made or {the Banks 3 been con- by the Cen- Nationalisa- rection and vested in a ad the Cen- ae member- in the dis- ctions in entral Gov- serve Bank, has all the seen used in the Banks t been used, sration: The 1a public or constitute a osing it, and much as the ship to these ed earlier, in there dre vate, and its ated through d before the ules v. Com- ASHOKA MARKETING LTD. v. P.NB. (Agrawal, J.) 425 ‘monwealth" in relation to the Commonwealth Banks established as a body corporate by the Commonwealth Bank Act, 1945, While rejecting this contention, Latham C.J. has observed : (CLR p. 227) “The Commonwealth Parliament has declared that the bank is a corporation and the court must on this, as on many previous occa- sions, accept that the bank (though it has no corporators) exists as a new kind of juristic person.” Similarly Dixon J, has observed : (CLR p. 361) “Although the Commonwealth Bank is declared to be a body corporate there are no corporators. I see no reason to doubt the constitutional power of the Federal Parliament, for a purpose within its competence, to create a juristic person without identifying an individual or a group of natural persons with it, as the living con- stituent or constituents of the corporation, In other legal systems an abstraction or even an inanimate physical thing has been made an artificial person as the object of rights and duties.” 21. It may also be mentioned that in RC. Cooper v. Union of India’ this Court, while referring to nationalised banks constituted under the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, has treated the nationalised banks as corporations, 22, While construing the expression ‘corporation’ in Section 2(e) (2) (W of the Public Premises Act it cannot be ignored that the object of the legislation in enlarging the definition of ‘public premises’ in Section 2(e) is to make available the machinery of the Act for evicting unauthorised occupants not only from the premises belonging to the Central Govern- ment but also from premises belonging to companies, corporations and statutory bodies in which the Central Government has a substantial interest. Under Section 2(e) (2)(é) premises belonging to 2 company incorporated under the Companies Act, 1956, in which not less than fifty-one per cent of the paid-up capital is held by the Central Govern- ment, are to be treated as public premises. It could not be the intention of Parliament that premises belonging to public corporations whose entire paid-up capital vests in the Central Government and who are the instrumentalities of State would be excluded from the ambit of the definition of ‘public premises’. In our opinion, therefore, the expression ‘corporation’ in Section 2(e) (2)(éi) of the Public Premises Act would include public corporations of the new pattern constituted under the Central Acts whercin the entire paid-up capital vests in the Central Gov- ernment. M1 (1948) 76 CLR ¥2 (1970) 1 SCC 248 ; (1970)3. SCR 530426 SUPREME COURT CASES (1990) 4 sec 23. Shri Yogeshwar Prasad has placed reliance on the decision of the Court in S.S. Dhanoa case* wherein this Court has considered the question whether the Cooperative Store Ltd, a cooperative society registered under the Bombay Cooperative Societies Act, 1925 is a corpo- ration established by or under a Central, Provincial or State Act, for the Purposes of clause Twelfth of Section 21 of the Indian Penal Code. This Court has observed that a corporation established by or under an Act of legislature could only mean a body corporate which owes its existence and not merely its corporate status to the Act and a distinction has been drawn between 2 corporation established by or under an Act and a body incorporated under an Act. It has been held that the Cooperative Store Ltd., which is a socicty registered under the Bombay Cooperative Societies Act, 1925, is not a statutory body because it is not created bya statute and that it is a body created by an Act of a group of individuals in accordance with the provisions of a statute. This decision does not lend any assistance to the contention of Shri Yogeshwar Prasad. 24, In Oriental Bank of Commerce case? the question for considera- tion was, whether the Chairman of a nationalised bank is a public servant and sanction under Section 197 of Code of Criminal Procedure was necessary to prosecute him. M.L. Jain, J. has held that the nationalised bank is a body corporate and not a corporation within the meaning of clause Twelfth of Section 21 IPC and, therefore, the Chairman of the nationalised bank is not a public servant under Section 21 IPC. The learned Judge has further held that cven if the nationalised bank is a cor- poration, the Chairman of the said bank is not in the service or pay of the bank and further (in the facts of the case) it could not be said that the Chairman was acting or purporting to act in the discharge of official duty. Sachar, J. did not consider it necessary to deal with the question, as to whether the nationalised bank is a corporation because he was of the view that Section 197 CrPC was not attracted. For the reasons men- tioned earlier, the judgment of Jain, J. insofar as it draws a distinction between a ‘body corporate’ and a ‘corporation’ and lays down that the nationalised bank, though a ‘body corporate’ is not a corporation, cannot be upheld. The other reason given by Jain, J. is that the nationalised bank is merely a personified institution having no members and is, there- fore, not a corporation. This view also cannot be sustained. We have already pointed out that in order to constitute a corporation it is not necessary that there should be shareholders or members and that in the new pattern of public corporation that has developed there are no shareholders or members. 25. Keeping in view the provisions of the Banks Nationalisation Act we arc of the opinion that the nationalised bank is a corporation estab- lished by a Central Act and it is owned and controlled by the Central Governm: | premises | @ therefore, that prem ambit of t the Public | 26. S) defined in premises premises | commerci unconstite | © 19(1)@) a submission sustain the | preferred « We find nc 21. Tt ‘public pre tial purpos. from its an e tion was a Public Pre rejected th: include 1 applice 28, We for comme preflises’, y to equality g freedom to Article 19( under Artic person in uw: cial purpose A 41 of the ¢ Reasons th: speedy mac premises. It premises aft to provide :90) 4scc ceision of dered the ve society sa corpo- ct, for the ‘ode. This an Act of existence has been ad a body tive Store ‘operative sated by a viduals in + not lend considera- ic servant dure was tionalised caning of an of the IPC. The kis a.cor- pay of the J that the ‘cial duty. ion, as to vas of the ons men- listinetion 1 that the on, cannot tionalised lis, there- We have 1 it is not hat in the re are no sation Act ion estab- e Central ASHOKA MARKETING LTD... P.N.B, (Agrawal, J.) ant Government. The premises belonging to a nationalised bank are public premises under Section 2(¢) (2)(ii) of the Public Premises Act. We are, therefore, unable to accept the contention of Shri Yogeshwar Prasad that premises belonging to a nationalised bank do not fall within the ambit of the definition of ‘public premises’ contained in Section 2(e) of the Public Premises Act. 26. Shri Yogeshwar Prasad has also urged that ‘public premises’ as defined in Section 2(e) of the Public Premises Act, must be confined to premises let out for residential purposes only and should not cover premises let out for commercial purposes and that if premises let out for commercial purposes are included, Section 2(e) would be rendered unconstitutional as being violative of the provisions of Articles 14, 19(1)(g) and 21 read with Articles 39 ond 41 of the Constitution. The submission of Shri Yogeshwar Prasad is that a construction which would sustain the constitutionality of the provisions of Section 2(e) should be preferred over 2 construction which would render them unconstitutional. We find no force in this conteation, 27. There is no warrant for confining the scope of the definition of ‘public premises’ contained in Section 2(e) to premises used for residen- tial purposes only and to exclude premises used for commercial purposes from its ambit. In Hari Singh v. Military Estate Officer‘ a similar conten- tion was advanced and it was argued that the expression ‘premises’ in Public Premises Act would not apply to agricultural land. This Court ‘ejected that contention with the observation : (SCC p. 249, para 23) “The ward ‘premises’ is defined to mean any land. Any land will include agricultural land. There is nothing in the Act to exclude the applicability of the Act to agricultural land.” 28. We are also unable to hold that the inclusion of premises uscd for commercial purposes within the ambit of the definition of ‘public preffises’, would render the Public Premises Act as violative of the right to equality guaranteed under Article 14 of the Constitution or right to freedom to carry on any occupation, trade or business guaranteed under Acticle 19(1)(g) of the Constitution or the right to liberty guaranteed under Article 21 of the Constitution. It is difficult to appreciate how a person in unauthorised occupation of public premises used for commer- cial purposes, can invoke the Directive Principles under Articles 39 and 41 of the Constitution, As indicated in the statement of Objects and Reasons the Public Premises Act has been enacted to provide for a speedy machinery for the eviction of unauthorised occupants of public premises. It serves a public purpose, viz. making available, for use, public premises after eviction of persons in unauthorised occupation. The need to provide speedy machinery for eviction of persons in unauthorised 60%6 Inivoduction and Corporace Personality 1.6 Types of company Introduction Companies are formed for many different purposes and yet the statutory requirements imposed on companies are elaborate and demanding, ‘To provide a reasonable degree of flexibility and freedom t choose what suits the user best the law permits the formation of different kinds of company, with features adapted to the circumstances of the case, It also provid of an existing company so as to make ita company of a different type. ‘This conversion is effected by making changes in the company’s structure under the preseribed procedure and then applying to the registrar for validation of the change by the issue of a certificate of re-registration (at the registry) of the company in its new category. This: se ribes the different types. of company and how they may be re- gistcred in a new category s for the conversion Limited and unlimited liability A previous section (section 1.2. Esseniial fewtures of @ company, Limited lability) has explained that a member's liability is to the company but it may be a liability which is limited. Unless it is so limited he is liable, if the company becomes insolvent, to contribute whatever amount is required to enable it to pay: ity debts in full. That is the position of a member of an unlimited company A limited company is limited cither by shares or by guarantee, ‘The former is by far the more important and numerous of the two types. It is always possible to discover whether a company is limited, and if so, by what means, by inspecting it memorandum 1 company limited by shares The memorandum of a company limited by shares includes a clause which states merely that ‘the liability of members is limited’. There is no. ‘express reference 10 limitation of Hiabiity by shares, ‘The effect is that a holder of shares is liable to conttibute to the company’s assets the amount of the issue price of the shares which is fixed at the time of issue If that amount has been paid by him or by @ previous holder, the liability attached to the shares has been discharged and they are “fully paid’, ‘The present holder of fully paid shares has no further liability wy the company. ‘The company may not without his consent increase the amount due on the shares: s16. If the the shares will be worthless but that is the entire loss of the holder. Ifa person ceases to be a holder of partly-paid shares and the holder of those shares at the time of liquidation is unable (0 pay the amount due on them, the company fails erstatutory chat suits wm, with onversion pe. This inder the we ghange mny in its ality) has ly which ilvent, to. by wha 1 states rence to xpany’s af issue tached older of nay not any fails of those em, the Types of compeny previous holder is liable to pay on them, if he ceased 10 be a shareholder within the revious year and the company has debts incurred while hye was a member and still owing: 1A s74, A company limited by guarantee In this case the memorandum contains the same basic statement of limited liability to contribute tw the but also has another clause, whereby every member agree: companys assets, if it isin tiquidation and unable to pay its debts in full. “The maximum amount which he is to contribute is stated, and it is not usually: larg That is the limit of his liability in respect of his guarantee If present members are unable to satisfy their undertakings to the company any sons who ceased 10 be members within a year before the commencement of winding up are liable to contribute. But their liability is restricted to the amount of any debts of the company incurred while they were members and still outstanding sce Chapter 13, section 13.2 Consriducinns} Tn the past it was possible, though unusual, 10 form companies Limited by guarantee which also had a share capital, In those cases members (and. past members) had a double liability in respect of shares and of guaranteed contributions However, since 1980 it has nor been possible to incorporate new companies of this hybrid type: s1(4). A creditor of 4 company limited by guarantee has no right of direet recourse against its members as guarantors. If the company does not pay his debt, he should take action to get the company put into liquidation, It will then be the duty of the liguidator to call for payment under the members’ guarantees and apply the money towards payment of the debts. Tf the company charges its as members’ obligation to the company since their guarantees are not an ‘asset’ in the technical sense. Companies limited by educative, research, charity, or as a trade possibly fees earned by its services, 10 me guaranices are held in reserve to provide ts as seeurity the charge dees not apply to the antec are usually formed for non-commercial ssuciation. ‘The purposes, such company applies its current income. recurrent oulgoiags. “The member additional funds which may be needed in winding up the company Unlimited companies There is nq statement of limited Jiability in the memorandum and the members are liable to contribute, without limit, whatever is required for payment of the debts of the company, in liquidation. ‘The position of ereditors and of past members is as stated above. An unlimited company usually has 2 share capital but it is not required 10 do so. An unlimited company is not subject to the restrictions, applicd to limited 62i j i jj i H fi F 28 | rtradatton Ad Chrporate Paani | 1 e 1 ! companies, on return of capital 10 members. It is not liable to pay the 1 per cent capital duty on consideration received ifor its share | ‘The most important advantage of an unlimited company is that it need not usually deliver to the registry a copy of its annual accounts for filing. It may therefore keep sceret its financial affairs. However, an unlimited company’ does not have this privilege if it has @ subsidiary undertaking which is a limited company or if it is the subsidiary undertaking of a limited company’ or is controlled by two or more limited companies: 8254, An unlimited company is most suitable if its purpose is to hold property: or to perform some activity which does not entail liabilities. Re-registration of limited companies as unlimited and vice versa In either case the re-registration procedure (ss#9-52) requires that the company’ shall first alter its memorandum (including its name), and possibly its to its previous status, before making application with the relevant documents t0 the registrar, For conversion from limited to unlimited status the written consent of every member is required since each will then have unlimited liability For conversion from unlimited to limited a special resolution of the company suffices. ‘To prevent abuse, however, former members of the company, if it goes into insolvent liquidation within three years of re-registration, may be liable to contribute towards payment of outstanding debts incurred while they were members: TA. $77 Re-registration of this type is irreversible, ie the company may change once from limited to unlimited or the other way, but may not thereafter convert back, articles if they refer Public and private companies A publi ‘company is one which 1 s limited by shares (includ which also has a share capital): includes in its memorandum a clause stating that it is @ public company; and has been registered at the registry as 2 public company. To obtain that registration the company must have an authorised share capital of at least £30,000 and adopt a name which ends with the words ‘public limited company’ br its abbreviation ‘ple’ (or the Welsh equivalent if it isa Welsh company); $1(3), g the rare ease of a company Timited by guarantee Any company which is not a public company is a private company. A company limited by guarantee, unless it also has a share capital, and an unlimited company must always be private companies since they do not satisfy requirement (1) above. In various parts of this textbook mention is made of the more stringent rules applicable to public companies. On the other hand only a public company is permitted to raise capital in large amounts by the issue of securities on the Stock Exchange or | 222| per cent need not It may does: not pany or if crty oF to any shall they refer us to the of every company goes into. nee from cuaraniee and vin’ that at least ompany” ys $14). mnpany ‘omnpany bove at rules ermitted mange oF Types of company 29 other securities markets (as explained in Chapter 5, section 5.2) on flotation. Normally, therefore, it suits a private company best to preserve that status until, if ever, it is large enough to be “floated” and has need to raise capital by that means. ‘A subsidiary of a public company may be either public or private, A private company which has an authorised capital of £50,000 or more is not required to register as a public company, It is entirely optional For a public company the minimum membership is two, but one person may, for a lawful purpose, by subscribing his name to a memorandum of association and otherwise complying with the requirement of the 1983 Act im respect of registration, form an incorporated company being a private company limited by shares or by guarantee: s1(3A) of the 1985 Act, as inserted by the Companies (Single Member Private Limited Companies) Regulations 1992 ‘The name of a private limited company cnds with ‘Limited’ or ‘Ltd’ unless it qualifies under s30 to omit it (as explained in Chapter 2, section 2.2 Omission of the word ‘Limited’ from a company nane). This is the readiest means of distinguishing, in examination questions, whether the company is public or private. Many private companies, especially if formed before 1981, when the basis of classification was altered, include in their articles a power t0 the directors to reject a share transfer (among other restrictions). These restrictions are no longer required by law but private companies often prefer to have the means of excluding from fasal to membership an unwelcome transferee of shares (see Chapter 6, section 6,7 register a transfer) Public company — commencement of business The procedure for forming a new company is described in the next chapter. It is the same for « public as for a private However, if a company is formed as public from the outset, it is required by S117. to. obtain ich entitles it to commence business, For that purpose the company must haye allotted shares of a nominal value of at least £30,000 and received the consideration to the extent of at least one quarter of the nominal value plus the whole of any premium. ‘A newly formed private company may commence business as soon as it has been incorporated, It is therefore more convenient and usual in practice, if @ publ company is required, 10 fori it-as a private company and then re-register it as public campany under the procedure described below company m the registrar an additional certificate w Re-registration ofa private company as public _ A private company limited by shares may apply to the registrar for re-registration as @ public company under s43. In outline the procedure is that the company first holds a general meeting to pass 2 special resolution to apply for re-registration and. to. make alterations to its30 Ditroduction and cour Personal | memorandum, and if appropriate to its articles. The essential alterations to the memorandum are (1) to adopt a name with the ending ‘public limited company’ or ‘ple’ and (2) to include a clause declaring that this is a public company: With the application to the registrar are submitted accounts and an auditors report. Among other points the registrar must satisfy himself from the documents that the company has an authorised and issued share capital of at least £50,000. ‘The final and decisive stage is the issue of the registra registration as a public company. °s certificate of re~ Re-registration of a public company as private If the authorised capital of a public company is reduced to less than £50,000 eg under an authorised reduction of capital, it. must be re-registered as a_ private company. ‘There is also a procedure for voluntary re-registration under $53. The procedure requires a general mecting to pass a special resolution to make the necessary change of name and to omit the clause from the memorandum declaring that this is a public company. ‘The conversion of the company to a private company may prejudice the interests of members. It is therefore provided thar members who hold at least 5 per cent of the issued share capital, or of a class of capital, or if the company is not limited by shares 5 per cent of the members, or 30 members may within 28 days of the passing of the resolution apply to the court for relief. Among other possibilities the court may order the company to purchase the shares of the objectors. Holding and subsidiary companies There are now vo different definitions of the relationship which constitutes ‘group of companies’, For determining when consolidated group accounts are required (see Chapter 14, section 14.1 Parent companies and subsidiary undertakings) the defined terms are ‘parent company’ and ‘subsidiary undertaking’. To prevent evasion these terms have been so defined that group accounts are required in some cases where the narrower relationship of ‘holding company’ and ‘subsidiary company” does not exist. For all other purposes company statute law uses the te and ‘subsidiary’, as defined by the revised 736 which is explained below. For example a subsidiary may not usually acquire shares of its holding company (Chapter 6, section 64 Prottibivion against shareholdings) and the directors of a holding company are subject to a genera the holding company and its subsidiaries (Chapter 9 section 9.1 Directors’ transactions): $823 and 330. By the revised definition one company (H) is a holding company and another company (S) is its subsidiary in any of the following ms ‘holdin, company" prohibition against obtaining loans from ircumisiances:ais 10 the mpany® or 1 auditors locuments. 000, we of re 50,000 eg a private srocedure vy change +a publie interests rT cent of mited by © passing the court stitutes a unts are reakings) prevent in some ubsidiary ompany? ow, For sompany ns of a rns from, Ourecters’ another rm ' H i | | Types of company 31 1) H holds & majority of the voting rights in'S; 2: H is a member of S and has the right to appoint or remove a majority of the board of directors of S; 3. His a member of § and has sole control, pursuant to an shareholders or members, of a majority of voting rights in S; 4. Sis a subsidiary of X (a company) which in turn is a subsidiary of H. greement with other $ is the ‘wholly-owned subsidiary? of LL if it has no members other than (1) H itself (2) wholly-owned subsidiaries of H or (3) persons acting on behalf of H or its other wholly-owned subsidiaries. Voting rights mean rights to vote a all, matters. H is treated as having the right 10 appoint 2 director or directors af S if (by the articles of S) directors of H are automatically directors of S or H itself is a director of S. If however H must obtain the consent of another person in exercising its power to appoint or remove directors of S, that is not a right which (2) above takes into account, Among other statutory provisions (of 736A) the rights of a nominee (of I or eneral meetings of Son all, or substantially another person) are in this contest attribuced to Hor the other person, and rights of subsidiaries are attributed in their entirety to the holding company. If, for example, His the registered holder of 10) per cent of the shares of S, but another 10 per cent is held by a noniinee of Hand 31 per cent by X Ltd, in-which-H has @ 60 per cent sharcholding, His deemed to have 51 per cent of the shares of $ and so has a majority of the voting rights for the purposes of case (1) above. ‘The general intention and effect of these definitions is to make $ the subsidiary of H, if H has control of S, The current definition, unlike the previous one, does not apply an alternative the shares of $ would count. In practice there is less difficulty over these complex rules than might appear at first sight, since most subsidiaries are wholly-owned. In the past the term ‘parent” oF ‘parent company’ has been used colloquially as a synonym for ‘holding company*. It is now incorrect usage since ‘parent company’ is itselfa defined term with a different meaning Other types of company ‘The following eategories require only brief mention: 1. ‘hod corparate’ or Searporatinn’ are terms used oveasionally in the Companies Let to apply a legal rule to companies incorporated outside as well as inside the UR, ‘Thus, all such corporations, if members of the company, mey send an authorised representative fo its general mectings: $375 (Chapter 8, section 8.1 Attendance at meetings); ‘oversea company’ means a company incorporated outside Great Britain. (which does not include Northern Ireland) which hay established a place of business in terion by which beneficial ownership of more then half32 Introduction and Corporate Personality Great Britain. Such companies are subject to selective and adapted rules of British company law; “Welsh company’ means (821) a company which by its memorandum provides that its registered office shall always be situated in Wales, It may then make use the Welsh language for certain purposes. Very few companies established in Wales, for which this is a possible arrangement, do in fact include such stipulation in their memorandum; Misted company’ means a company whose xchange (as explained later (see Chapter 5, section 3.2) in connection with flotation’ of companies). Strictly it is the securities, ie shares or debentures which are listed and net the company. The same company may, for example have listed shares and unlisted debentures. ‘Listed’ is the correct expression since it means that the securities have been admitted to. the Official List for Stock Exchange dealings. Formerly the same idea was expressed by the word “quoted” and this is still sometimes used instead of ‘listed’. 4 listed! company must always be a public company: PSA 3143(3). But not every public company is listed. An unlisted company, including all private companies, is one whose securities are not listed; Small or ‘medium size?’ company, as defined by $247, as amended, is a private company which falls within certain limits (as explained later (see Chapter 4, section 14.1) in connection with accounts) and so qualifies for certain remissions in the contents of the copy of its accounts delivered to the registry for filing (s. Chapter 14, seetion 14.1 Evemptions fiom statutory requirement). ities are listed on the Stock5 Company Formation §.1 Promoters and pre-incorporation contracts 5.2. Flowtion 5.3 Liability for defects in listing particulars and prospectuses 5.1 Promoters and pre-incorporation contracts Definition of promoter ‘he best description of a promoter is that of Bowen LJ in HWhaley Brdye Calico Printing Co v Greew and Smith (1879) § QBD 109, ‘The term promoter ts term oF business not of law, usefully summing up in a single word a number of business operations familiar to the commercial world by which a compiny 4s generally brought into existence.” Cockburn G} in Tivyeross v Grant (1877) 2 CPD 469 defined promoter as ‘one who undertakes to form 2 company with reference to a given project and to set s¢ going, and who takes the necessary steps to accomplish that purpos: ‘The definition is very wide and practically anyone who performs variows functions with a view to incorporating a company will be a promoter. ‘The «crm may also cover individuals who arr: Capital, negotiates preliminary arrangements, and registers the memorandum and ion, ge for someone to become a director. procures articles of assi ‘Those who act in a purely ministerial capacity, eg solicitors, accountants, valuers, will not be considered promoters merely because they have ed to become directors oF find others who will be: Re Great Wheal Polgomh Co Lud (1883) 33 Ly} Ch 42. In this area of the law, the courts have not attempted t0 define more cleariy who isa promoter and the definition is only by reference to the person's work. Note that a promoter may be an amateur or @ professional such as a merchant bank. The advantage of having such a flexible definition is that it ensures that any person who fulfils such a function will be subject to the rules, duties and obligations of a promoter. However, the danger is that a person acting as a promoter according to the definition, docs not know that there are certain obligations he has to fulfil. Professional promoters were particularly prevalent during the latter part of the nineteenth century and much of the case law is from this period. Typically, they 82calico mof iness rally tit ious ures and ome shy saely Note any ding the hey Promoters and pre-incorporation contracts 83 would act as a syndicate and purchase land said to contain valuable minerals. They would then form # company and sell the land to the company at an inflated price. Members of the public would have been invited to subscribe for shares in the company only 10 find at a later date that the land was less valuable than claimed and that the promoters had moved on, Today such cases are extremely rare. The vast majority of companies begin life as private companies and those that promote them also become the directors. So, unlike the professional promoters of the nineteenth century, they continue to have a vested interest in che company after the promotion has ended Who are the promoters? In secking to find out who are the promoters of a company, it is helpful to ask the following questions: 1, Who had the idea to form the company for the purpose in question? 2, Who drafted the memorandum and articles or gave instructions to solicitors to prepare them? 3. Who paid for the registration of the company and cost of preparing the documents? 4. Who arranged for persons to become the first directors? ‘This is only a guide and is by no means decisive; a person may have done none of these things and yet be a promoter: see further J 1 Gross, ‘Who Is a Company Promoter? (1970) 86 LOR 493 The duties of the promoter The promoter owes a fiduciaey duty to the company which bas something in common with the obligations imposed on a trustee towards the cestui que trust and on an agent towards his principal. Professor Pennington, Peniugtin's Company Lam, 6th ed, ps and principal and points out that (on the authority of Ovenium Electric Palaces Lid v Baines (1914) 1 Ch 332) there is no absolute prohibition against « promoter mabing a i$ transiction, It is the making of a secret profit that is forbidden There cannot be a contractual relationship because the company does not exist when the promotion begins In formulating remedies ty fi particular eases the courts have also appareatly imposed on a. promoter 2 duty 1 promote the interests of the company: Jacuhus Marler Estaies Lat» Marler (1913) 85 However, two developments have made it difficult to develop an analysis in terms of common law or equity. First, prospectus law (see section 5.2) has imposed on promoters statutory obligations of disclosure and responsibility for the issue of a misleading prospectus. Secondly, in modern practice the events leading up to the +, considers that the closer analogy is with the relationship between84 Company Formation flotation of a public company are closely supervised by merchant banks which, with their advisers, take great pains to avoid any infringement of their clients’ obligations, Henee, there is little modern case law on promoters’ defaults To sum up, a promoter must comply with statutory duties of disclosure Secondly, at common law he must account for any profit which he may make his transactions, unless he has made disclosure of his interest and of his: profit (if any) to the company, as explained below To whom disclosure must be made In Erlanger v New Sombrero Phosphate Company (878) 3. App Cas 1218 the court held that disclosure should be to an independent board of directors, ‘The appellant acqutired the lease of an island for £33,000, A company was formed and the lease was sold to the company’ for £110,000. The appellant was a director of the company The House of Lords held that the company was entitled to rescind the contract and to recover the pure by the promoter of the profit he made. Lord Cairns LC said that ‘what he could not do was to make @ profit without the knowledge of care that he sells the property to the company through the medium of an se money from the appellant as there had been no disclosure © company”, He should take independent board of directors. This rule way found to be too strict since an entirely independent board of directors would be impossible in the ease of most companies, and it was held in Lagunas Nitrate Cov Lagunes Syndicate Led [1899] 2 Ch 392 that disclosure to the members would be equally effective, Lindley J in that case said disclosure was deemed necessary ‘to all available members of the company’ The position, therefore, seems to be this: disclosure must be to 1. an independent board of directors; or 2. existing and potential. members as a whole (potential members via the prospectus). Disclosure to directors who are mere rominees of the promoter will not be sufficien to relieve the promoter of liability, however. In Gluckstein » Barnes [1900] AC 240 syndicate headed by the appellint bought land and resold it t a newly forme company, The profit made on the transaction was disclosed in the prospectus. However, the additional profit made by way of reimbursement of outstanding charges on the lind which the syndicate had bought ata discount was aot disclosed It was held thar the promoters were liable to account to the company for the profit made on the charges. Lord MacNa ten said: “Disclosure is not the most appropriate word to use when a person who phys many parts announces himself in in another; to tlk of disclosure to 2 company where there are no shareholders as yet is a mere farce’, In such a case the information should be given in the prospectus. See Re Leeds & Hanley Thee Vavieties |102| 2 Ch 809 where the defendant company purchased two music halls one character what he has done and is doin:Nich, with igations, isclosure, ake from profit (if he court ippellant he lease impany ract and selosure auld not ile) take of an oard of held an to the me was ia the ficient 2a formed pectus, anding closed pratit most self in etoa se the halls Promoters and pre-incorporation contracts 88 and had them conveyed to its nominee. The purchase price was £24,000. The defendant company then promoted the plaintiff theatre company and sold the two music halls to it for £75,000. ‘The original board of the plaintiff company was not independent ancl the prospectus issued to the public failed to disclose the interest of the defendant company or the profit i . The Court of Appeal held that the prospectus should have disclosed its interest and profit and the defendant company was in breach of its fiduciary duty. The company: was liable in damages Remedies Jor breach of promoter’s duties Resci The equitable remedy of rescission is available to the company in respect of any contract entered into as 4 result of non-disclosure or mistepresentation. ‘The remedy must be exercised on normial contractual principles; the campany must not ratify the greement and this remedy is not available if the company is in liquidation. The remedy may be unavailable to the company if any of the affirmation (subject to the rule preventing ratification of bre: of fraud on the minority: mand v Merrymeather (1867) LR sion ars to rescission apply of duty dy way «q 4040); 2. lapse of time; 3. intervention of a third party right; 4. inability to make restitutio in integrum, ic substantially restoring both parties 10 the original position: Re Cape Bretan Co (1883) 29 Ch 1) 795 (facts given below) cretion under s2(2) Misrepresemation Act 1967 t declare the contract subsisting and award damages in liet of rescission, 5. the court's Accounting for the undisclosed profit Unless @ promoter cin be held accountable on some other basis, Property he way acting as the company's agent ( must then have been formed so that it iy an existing principal), it is not generally possible tor the company both to retain the property and reduce the price paid by calling on the promoter to secount for his profit, The primary remedy, if the profit is not disclosed, is rescission and a financial remedy (if any) is usually a claim for damages, if there is the basis for claiming damages at all. Re Cape Breton Cn (1883) 29 Ch 795 illustrates the obstacle to making a simple claim for the promoter’s profit In Re Cape Breton six partners purchased Coal mines for £5,500 and mined them during the partnership. The company was formed and two of these same parmers became directors, “The company purchased the mines for £42,000. The vendor was one of the original parmers who. sold the including the two directors. The company went into liquidation and therefore rescission was impossible so the company attempted to suc the directors for the secret profit made on the transaction. ‘The court dismissed the claim. ‘The court distinguished the Erlaager ease (above) on the ground thal, in that case, the n buying the sg that dl for this purpe the company mines as trustee for all the six. partners86 Company Formation appellant purchased the property in order to sell it to the company and so the mines were purchased for the company. ‘The position, therefore, seems to be this: if the company finds out that the promoter has made a secret profit, it can: 1, rescind the contract where the property belonged to him before he started acting as a promoter (unless the company is in liquidation as in Re Cape Breton); or 2. affirm the contract and claim damages if the promoter was the agent of the company. Damages Promoters may be liable for damages for misrepresentation inducing a contract and not for breach of fiduciary duty as such. In Re Leeds and Hunley Theatre of Varieties (1902) (see section 5.1 To whom disclosure musi be made) the court held that, since the defendant company owed a fiduciary duty towards the theatre company, and it had breached that duty, it was liable to an action in damages which was assessed as the difference between the market price and contract price, ie the amount of the profit In Re Jubilee Cotton Mills (1920 Ch 100 the promoter was held liable in damages for taking an allotment of shares as consideration for the sale of his property. which was over-valucd. It may also be possible ta base a claim for damages on the principle that a promoter owes a duty of care to the company Other remedies A promorer could be held liable in damages for negligent mis-statement on the principles laid down in Medley Byrne y Meller & Parmers Lid [1964] AC 465 and Mutual Lije and Citizens’ Asinrance Co Lad v Reatt (W71] AC 793 for false statements about the company in the prospectus. ‘There is also a remedy in damages under s2(1) Misrepresentation Act 1967 Where the company is in liquidation, the liquidator may recaver socret profits and damages fom the promoter even if what is recovered is used to pay off all the company’s debts. Compensation for loss or damage caused t0 9 subscriber of the company's shares nent in the prospectus of which the promoter was a party is also available: as explained in the section on prospectus issues (see section 5.3). on the faith of an untrue st Remuncration of promoter ‘The traditional way for promoters to obtain their reward was in the form of profit made on property sold to the company or some other ancillary transaction, provided disclosure was made, Where the promoters have only provided services and incurred expenses then difficulties may arise when considering how promoters are to be renumerated for this. Pethaps the best way to ensure enumeration for promotional services and reimbursement for expenses is for the articles to contain a provision allowing theting the and ties the nad the fit es ch ne Promoters and pip-intorpration: cntracls 87 ‘ i i directors a discretion to pay such sums. There is such ‘provision in the current ‘Table A, although there was in the old Table A of 1P48. Off course, such a provision does not create a binding obligation but there will hot usually be a problem where the company promoters become its first directors. | Another possibility is for the company, once it has been formed, to contract with the promoter to pay for his services and expenses. This will have to be a deed contract to be enforceable because the promoter will already have performed his scrvices to the company. Therefore this will amount to past consideration, ruling out a simple contract A purported contract, to pay for a promoters services and expenses, between the company and the promoter before the company is formed, will have no effect for it is not possible to contract with a person who docs not exist. Similarly, after formation it is not possible for the company to ratify the contract. This is because ratification takes effect from the time the contract was made and at this time the company would not yet have been formed. These points are developed further under the following heading, ‘Pre-incorporation contracts’. Finally, mention should be made of remunerating promoters by issuing them with shares in the company. Historically, this was a popular method whereby promoters would take deferred or founders’ shares in the company which often gave them favourable dividend and voting rights. Such shares are now uncommon, Public companies by virtue of s99(2) are prohibited from accepting services in exchange for shares. Details of any renumeration together with who it is to be paid must be disclosed in any prospectus the company iss Pre-incorporation contracts A pre-incorporation contract is a contract purported to be made by or on behalf of a company which has not yet been formed. The question which arises is who is liable ‘on such contracts? Is the company liable or is it the promoter who incurs liability? At common law the following rules were established 1. Until & company is formed it has no legal existence. A company comes into being from the date in its certificate of incorporation: S13 and Re Jubilee Coton Mills [1920] Ch 100, Prior to this a pre-incorporation contract cannot be enforced by or against the company, for it is not possible to contract with a non-existent person. ‘This js illustrated by the leading ease of Kelner v Baxter (1866) LR 2 CP 174 In this case Baxter and two other promoters agreed to buy some wines and spirits from Kelner and signed the order on behalf of an hotel company which they had not yet formed, When the company was formed, the wines and spirits were consumed but the company failed before Kelner way paid. It was held that the company was not liable for the wines and spirits. Erle C] said! ‘When the company came afterwards into existence it was 4 totally new creature, having nights and obligations from that time, hut no rights or obligations by reason ol anxthing which might have been done before.” #3 Bemis88 Company Formation 2. An attempt co ratify the contract by the company after it hes been formed will not save the contract. This is because ratification has retrospective effect and attempts to give authority to a person at the time the contract was made. Since a company will not have been formed at this time it cannot be given the necessary | authority: Kelner v Baster (1866) LR 2 CP 174, Natal Land Co Ltd v Pauline § Colliery Syndicate Lid (1904] AC 120. If the company is not liable on the contract, the promoters may be personally lisble: Kelner v Baxter (1866) LR 2 CP 174, +. Where the promoter does not sign the contract as aan agent, but merely: to authenticate the company’s signature then no contract exists at all: Newsome v Sensolid (Great Britain) Ltd (1954) 1 QB 45. A company may have rights and obligations under the contract where there has been a nosation. This consists of the substitution of a new contract, once the company has been formed, for the pre-incorporation contract. ‘The difficulty is deciding whether there actually is a new contract, as merely ratifying or adopting the old one will not suffice: Re Northumberland Avenue Hotel Co Lub (1886) 33 Ch D 16 CA. A fresh contract way found to exist in Homard v Patent Ivory Mannficturing Co (1888) 38 Ch D 156 where an important term of the pre-incorporation contract, namely the price, was changed after incorporation and this was held to be sufficient ‘The common law position outlined above was altered in 1972 as a result of our entry into the European Community, On entry we had 1 comply with the First FEC Council Directive 68/151, art 7 of which states: “TE, before @ company being farmed has acquired legal personal out in its mame and the company does net assume the obligations arising fiom such sktion, the persons who acted shall, without limit, be jointly and severally lable therlor, unless otherwise agreed. ‘This was originally implemented in s9(2) of the European Communities Act 197 and can now be found in s36C(1) of the Companies Act 1985, It provides that A contract which purports to be made by or on behalf of a company: when the company has not been formed has elfect, subject to any agreement to the contrary, as one made with the person purporting to act for the company uF as agent for it, and he is personally liable on the contract aeordlingly.” The result is that the promoter is now personally liable irrespective of the capacity in which he contracts and any subtle distinctions raised by Avduer v Baxter and Newhorne onwlid are rendered irrelevant by $86C{1), However section, it still took a Court of Appeal decision to put the matter beyond doubt In Phanagram Ltd ¥ Lane (1982| QB 938 the defendant signed the contract “for and on behalf of Fragile Management Ltd’, a company whieh was not yet formed ‘The plaintiffs sued for the return of an advance payment repayable under the terms reement, claiming thar the defendant was personally liable under what is despite the presence of this of the adi will t and ince a essary vauline onally ly to © has © the hy is pling 6) 33 we Co tract, sient ty in this stor nied, ut is Promoters and pre-incorporation contracts 89 now s86C(1). The Court of Appeal found for the plaintiffs. Lord Denning felt that the section had ‘obliterated’ fine distinctions which had been created by the way promoters signed the contract. The words, ‘subject to any agreement to the contrary’ require an express agreement and cannot be inferred by a promoter signing as agent for the compan In recent years the main issue of concern has been the application of s36C(1) to non-existent and wrongly named companies. In Oshkush B'Gosh v Dan Murbel Inc and Craze (1988) + BCC 795 the Court of Appeal held that the section did rot apply to make a director personally Hable where the company’ was waiting for a new certificate of incorporation to reflect a change of name. ‘The company had ordered goods under its new name before the new certificate of incorporation bearing the new name had been issued. Could it be argued that the company had not yet been formed and that therefore the director who purported to make the contract on behalf of the company was personally lable? Nourse LJ held that the section had no application as the company was formed at the time the contract was made, despite the fact that it was acting and trading under an incorrect name. Nourse LJ also held that the issue of a new certificate of incorporation to reflect a name change under $s28(6) and (7) does not affect the continued existence of a company. In Goironie (UR) Ltd vy Desonie (1991] BCC 200 the Court of Appeal again excused a defendant from personal liability under the section. In this case a contract was entered into at a time when, unknown to both parties, the company had been struck off the register five years earlier and therefore did not exist. On discovering this a new company Was formed with the same name, However, it was held that this was not enough to make the defendant liable under s36C(1} because at the time of signing the contract the formation of the new company had not been contemplated The contract was therefore void since the company did not exist and the new company was not in the course of formation, however, a claim for quantum meruit was allowed, See also Badgerhill Properties Lud v Cottrell [1091] BCC 463 Finally, it is important to note that there are limits to the operation of s36C(1) First, it says nothing about the company’s liability, only that of the promoters. ‘Therefore the common law rules ate still applicable when considering the company’s position. Secondly, the section docs not make it clear whether the promoter ean enforce pre-incorporation contract; it mentions only: liability. It would be a strange result, however, if a promoter was liable on such a contract but could not enforce it Lastly, in Rover Internanioned Ltd Canon Films Ltd (1989) 1 WLR 912 CA, it wa held that the section will not apply where, following the pre-incorporation contract, the company is eventually formed outside the United Kingdom, for example in Gu ey ‘This last situation has now been remedied by the Foreign Companies (Execution of Documents) Regulations 1994 (ST 1994/950). Scetion 36C now applies wo a company incorporated outside Great Britain TS56 Company Law Cape Breton Co, Re (1885) 29 Ch D 795 Court of Appeal (Cotton, Bowen and Fry LJ) + No remedy was available for breach of a promoter's fiduciary duty when rescis- sion was no longer available Facts Fenn purchased some coal-bearing areas with six others in 1871 for £5,500. A company was formed in 1873, in which Fean became a director, and the land was sold to the company for £44,000 without Fenn disclosing that he ‘was a part owner of the land. The company affirmed the contract but the land was later sold by the company’s liquidator fora loss and an action was commenced against Fenn for breach of duty. Pearson J held that rescission ‘would have been available for non-disclosure, but that this was not available as the company had affirmed the contract. Furthermore, since Fenn acquired the property at time when he ‘was not in'a fidueiary position as.a promoter, he could not be liable for the difference in value between the price at which he bought and the price paid by the company. Neither could Fenn be liable for the difference between the price paid by the company and the value of the property at the time when the company bought it, as this would be making a new contract hetween the parties. The plaintiff appealed Held The appeal was dismissed and the judgmentof Pearson J was upheld Cotton LI ‘How, then, can Mr Fenn be made answer- able for what is called the profit. if at the time when he acquired the property he was ‘not trustee for the company, or in any fidu- ciary position towards the company. In my opinion, if we had to decide the question ‘without any assistance from the opinion of Lord Cairns, we ought still to say that Mr Justice Pearson was right, What is really profit made by a trustee? Itis the difference between the value of the property atthe time ‘of the purchase being made by the company, and the price which the company gave. Itis not the difference between the price that the trustee gave when he was in no-way a tuustce for the company and that which he got fom the company. We have not 10 ‘decide that in no case could a trustee under such circumstances be made answerable for the dference between the price paid by the company and the market value of an article which had some definite market value, and | will nor say what I should decide in such a ‘case. Here the property is one for which there is no market price. The only mode of ascertaining what is the value of such a property is to find how much a purchaser will give fort. If we were now to enter into the question what was the value, we should have odo so with the knowledge which has subsequently been acquired of this property, and should be making an entirely new bargain between the vendors and the company. The company have, with the knowledge of the facts, determined to hold the property which they only acquired by agreeing to pay a certain price, and although they may have been entitled to set that agreement aside, yet I think that as they, with knowledge of all the facts, elected to retain the property, it would be wrong to require the trustee to hand over to thera that money whiel was the only consideration upon which he agreed to give the property." Fry LI: Now, notwithstanding the very powerful criticisms of Lord Justice Bowen on the judgement of Mr Justice Pearson, [think that judgment right. think that the case is one in which the adoption of the contract by the principal puts an end, and ought ‘o put an tnd, toany further rights against the agent. It appears to me that © allow the principal to affirm the contract, and after the affirmance toclaim, not only to retain the property, but to get the difference between the price at ‘was bought and some other price, fer you may state it, and however you may turn the proposition about, to Fstis the io © at Promoters and Pre-incorporation Contracts. 57 enable the principal, against the will of his agent, to enter into a new contract with the ‘agent, a thing which is plainly impossible, ‘or else itis an attempt on the part ofthe prin- Cipal to confiscate the property of his agent ‘on some ground which, I confess, I do not understand. Ics said that, notwithstanding the ratifi- cation of the contract, the principal may claim some profits from the agent because these profits were made surreptitiously or clandestinely. It appears to me that the answer to that is this, that whatever the profils are, and however they are to be mea- sured, those profits resull, no from the orig inal contract, but from the affirmance of the contract by the principal, and that, therefore, the profits which are made by the agent are neither clandestine nor surreptitious. can conesive two possible claims being made. ‘The one would be on the view that the profits were the difference between the pur- ‘chasing and the selling price in the hands of the agent, but, as has already been observed by Lord Justice Bowen, that cannot possibly be the measure of the claim of the principal, because at the date when the agent pur chased he was not the agent of the princi- pal, and the principal, therefore, had no right to go back to that date and fix it as the time at which he acquired a right to retain the property at the price paid for it by the agent. The other claim would be on the view that the profits were the difference benween the real value, or the market value, if market value exist, and the actual price at which the property was sold by the agent to the prin- pal. [think the principal cannot claim that difference, because it appears to me that in such a case as this, where the principal had. no right to claim the property as haying been purchased on his behalf atthe smaller price, the voluntary ratification of the purctase by the principal is equivalent for this purpose to a new sale by the agent to the principal after the refation between them had ceased, ant that itis only in consequence of that ratifi- cation of adoption that any profits remsin in the hands Of the agent. In other words, therefore, | think it is not a case of profits made clandestinely of surreptitiously because those profits have not arisen from the original transaction alone but from the adoption of it by the principal. I think, there- fore, that the decision of Mr Justice Pearson ‘was right, and that this appeal must be dis- missed with costs.” Bowen LJ delivered a strong dissenting judg- ment as follows: “The principal's right to recover secret profit is in fact chiefly valuable in « case where the contract cannot be rescinded. An obvious analogy exists in a class of cases ‘well known to the lay, where a vendor has been guilty of fraud. The purchaser may, if he chooses, confirm the contract, and ney- ertheless sue the vendor for fraud. Applying, the saine sort of reasoning to the present ‘ase, I cannot see why the right of the cestui ‘que trust or the principal to elaim the profit fraudulently made by the agent or trustee, should be lost simply because he clects to keep the subject-matter or is unable to deter- rine the contract. It is said that by electing to keep the article sold, and at the same time insisting upon e return of the profits mace, the purchaser would be altering the contract, and would be endeavouring to keep the property sold to him at another and a difter- ent price. This objection, if it were sound, Xin common law eases, of which this, is not one, to prevent person who has brought a horse on a fraudulent warranty, feom bringing an action for fraud if he keeps the horse. With very great respect for the judgments of those who think otherwise, it seems to me to involve a fallacy. The cesiti que rrust who seeks to keep the thing pur- chased, and neventcless demands the profit improperly made, does not claim to be recouped part of the price as price, nor attempt in any way to vary the contract. The fraudulent agent or trustee who made the contract knew from the very first, or ought to have known, that it was an ineident of ‘equity and fair play attaching to such a con- tract, that an agent or trustee was liable upon demand to hand back any profit clandes- tinely made by him. Making a vendor return something which he ought not to haye, is not altering the contract, itis only insisting1i'| }s8 | [ape upon an incident which equity attaches to, it. A contract is not set aside merely because, fan incident which is attached to it by equity, is enforced, and in the same way it seems 10 ‘me that it cannot be seid that, by affirming aconiraet, the person who affirms it releases any right which is not inconsistent with the contract itself ‘Then it was urged that the profit made in this ease was not a liquidated sum, nor capable of being defined upon the materials before us. I agree that in the present case the measure of damage ought not to be the di ference between the price at which the prop- erty was bought by the director, and the sum at which it was sold by him to the company: for at the time when the property was bought, the person who bought it was in 110 sense a trustee for the company. But it does not seem to me to follow, that because the profit is not a liquidated sum itis to be eoa- sidered to be incapable of being ascertained, and therefore cannot be recovered from the fraudulent trustee. Possibly a considerable ‘amount of evidence would be required, but the difficulty of ascertaining the amourt of relief appears to me no reason for refusing relicf. Suppose the transactions had rclated to shares which had a market value, the measure of profit would be the difference between the market value of the shares at the saine time they were sold by the agent to his company, and the price at which they were sold. But is relief to be given in the case of shares, and to be refused in the case ‘of articles which have not a market value? Is trustee to be at iberty to pocket the ille- gitimate profit which he makes upon a picture ora gem, when he may not de so in the case of shares? It seems to me that the only difficulty in dealing with such a ease is the difficulty of assessment, and that isa difficulty which is deat with every day in every branch of the High Court. We are all familiar with the difficulty which arises where there is no exact measure of damages, and there is n0 more impossibility, as it ‘seems to me, in the present case, of arriving at o fair estimate of the real value of the property at the time of the sale to the company, than in any other case where you ! avejto deterining the valhe of b e epidence 4 t- t titled flys how Absurd il appears to }ne tw pretend to bbe wiser than such great ¢quity lawyers as my learned Brothers, I cannot help saying that Tam unable (o fallow the decision of Mr Justice Pearson.” Comment ' ‘The result of this decision would appear to be this: when a promoter sells his own property (0 the newly formed company which he acquired before he became a promoter he is under a duty to disclose his interest in the property. If he fails to do so then the remedy of rescission is available, but if rescission is no longer available (in this case it was not as the company affirmed the contract), then the court will not make the promoter account for the amount of any secret profit. The reasons given by the majority of the Court of Appeal are that Ue calculation of the profit would be difficult and that it would in effect be making a new contract for the parties. However, the dissent- ing judgement of Bowen LJ, in which he states that such difficulties should not deter the court, fay much to recommend it. In cases, such as this it may be that damages would be a more appropriate remedy as in the ease of Re Leeds and Hauley Theatres of Variety Lid [1902] 2 Ch 809 (see below), Cotronie (UK) Ltd v Dezonie [1991] BCC 200 Court of Appeal (Dillon, Balcombe and Ralph Gibson Lu) + Section 36(4) CA 1985 (see now 336C(1) CA 1985) did not apply to a con- tract with a company which had been struck off the register and dissolved Facts Mrs Osbourne entered into a contract with Wendaland Builders Ltd in 1986. The direc or and controller of the building company. akto be opery ch he rhe is in the emedy as the ecourt ‘or the sgiven ze that ‘ficult anew isgent- states er the ldbea of Re ty Lid rson econ- been with direc ypany Was; ME Dezonie. Unknown |to him the company had been struck off the register and dissblvdd five years earlier in 1981. On dis- covering this Dezonie incorporated another company with exactly the same name in 1987 and the issue arose whether he could enforce the contract under s36(4) CA 1885 (see row S36C(1) CA 1985). Held The contract with Mrs Osboume was a nullity. The first company called Wenddalannd Builders Ltd could not be a party to the contract as it did not exist at the time the contract was made. Neither could Mr Dezonie enforce the con- tract personally under s36(4) (see now s36C(1) CA 1985) because it could not be said that he \was ‘purporting to act for the company” within the meaning of the section, for no one had given a thought to forming the second company at the time of the contract with Mrs Osboame Dillon LE: “The judge in his judgment referred to a passage in Gore-Browne on Companies (44th ed) where it is suggested that, if that section applies, then any person who is liable to be sued under a Contract as having signed it on behalf of a company not yet formed can equally suc on it, and he reached the view theretore that Mr Dezonie was able to enforce, in the right of the new Wendaland Builders Lid (ihe second pany), the terms oF the contrat, I do not agree with the approach since T do. not regard s36(4) as applicable in this case, At the time of the 1986 building agreement no ‘one had thought about forming a new company at all. Accordingly itis not possi- ble to say that the contract purports to be made by the new company which was not actually formed until March 1988. No one thought of the new company because Mr Dezonie thought that the original company ‘was still in being. The original company, however, does not fit the wording "where a contract purports to be made by a company ‘or by a person as agent for a company at a lime when the company has not been Promoters and cae Contracts 59 formed”, because it had been formed long before. The problem was not one to which the European Communities Act was directed,” ‘Comment 1. This case identifies one of the limits tothe ‘operation of s36, namely, that it only to pre-incorporation contracts andl Rot to post-dissolution contracts. Tantalisingly, Dillon LI said that Dezonie “might” have a quantum meruit claim for the work done, Balcombe LJ used stronger language when he said that there was a prima facie entitlement to sue on a quantum mervit 2, In Rover International Led v Canon Film Sales Ltd (No 3) (1989] 3 All ER 423 Rover sued Canon for breaches of a film distribution agreement. Canon argued that they were not bound by the agreement as Rover was not incorporated at the time the contract was made. Rover argued that their agent who entered the contract on their behalf was entitled to enforce the contract under s36C(1) CA 1985. Alternatively, Rover argued that it was entitled to a quantum meruit payment, At first instance Harman J held that s36C(1) could not be relied on as Rover was eventually incor- porated outside the UK, in Guemsey, and that the section does not have extra-terri- torial effect. The claim for quantum meruit was dismissed and Rover appealed against this aspect of the judgment, The Court of Appeal held that Rover was entitled to a Quantum meruit, following a concession by counsel for Canon. In addition, the court held that Rover could recover monies paid on the basis of either a mistake of fact or a total failure of consid- eration. Section 36C(1) CA 1985 does now apply 6 companies incorporated outside Great Britain by virtue of the Foreign Companies (Execution of Documents) Regulations 1994 (SI 1994/950). 4. In Cotrontic it was assumed that s36C(1) xbd f oo | Comp ny spon | could be enforced by an }ndividual, éver though the section only mentions liability: The position has now been clarified by Etherton J in Braymist Led v Wise Finance Co Ltd (2002) 2 All ER 333. It was held that under s36C(1) of the CA 1985 a person who purports to make a contract on behalf of a company not yet formed can, as well as being personally liable on it, also enforce it against the third party Judgment was therefore given for Braymist English and Colonial Produce Co Ltd, Re [1906] 2 Ch 435 Court of Appeal (Civil Division) (Vaughan Williams, Romer and Fletcher Moulton LJ) + A solicitor was unable to claim against a company that had taken the benefit of his services Facts A firm of solicitors was instructed to prepare the memorandum and articles of association of the company and to pay the fees for its regis- tration. When the company went into liguida- tion the firm of solicitors lodged a claim for the work done by them. Held Despite the fact that the company had wken the benefit of the work done by the solicitors, the company was not liable in equity to reim- burse them for their fees. Romer Li: *L also think it right to state my views on thi point. In my opinion, with respect ro @ soli itor’s claim for costs for work done by him in relation to the formation of 2 company which is subsequently formed, in order to substantiate a claim against the new company for his costs as solicitor he must establish a legal claim against the company cither on his own behalf or on bebalf of some person or persons in whose shoes he is spon [ entitled to stand, If he cannot do that he ‘cannot succeed, in my opinion, in estal ing a claim on what are called equity grounds. The idea that a company merely because it has obtained the advantage of the solicitor's work done before the formation of the company is liable in equity for the costs of that work appears 0 me to be ‘wholly untenable. In my opinion there is no such equity, and any claim based upon it ought t0 fail. Comment 1. Inthe court of first instance, Buckley J treated the solicitors" claim for the costs of registration differently and allowed this part of their claim. This aspect of the deci- sion was not appealed against, but was overruled in the later case of Re Clinton's Claim [1908] 2 Ch 515. 2.. A promoter who claims for pre-incorpo- ration expenses from the company may also face difficulties in getting reimbursed. The basic problem is that since the company did not exist at the time the expenses were paid, it cannot incur liabil- ity for them when itis later formed, Even if the articles of the company give the Girectors’ discretion to reimburse promot- ers for their expenses, it can not be enforced by the promoters under s14 CA, 1985 as they will be suing qua promoter rather than qua member. See Hickman v Kent or Romney Marsh Sheepbreeders Association [1915] 1 Ch 881 in Chapter 6, Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 House of Lords (Lord Caims LC, Lords Penzance, Hatherley, 0’ Hagan, Selborne, Blackburn and Gordon) + A breach of duty by a promoter led to the remedy of rescission Facts A syndicate headed by Baron Erlanger pur- chased the lease of the island of Sombrero in the W coats Erlan prope perso comp other Erian comp pictw many Atth chase adopt ments merci cesshi direct, cover sough islanc £1108 Held Resci ‘memb the co lary: their i profit Lord} ‘Ca stan thin state two new theo inde this was tive they who Fact, coman, tito oin bd | | | ble and Pre-incorporation Contracts | | 61 the West Indies for £55,000, which wes said to contain valuable reserves. of phosphate. Erlanger then formed a company to which he proposed to sell the island for £110,000. Five persons were named 2s directors of the company; two of these were abroad and the other three were entirely under the control of Erlanger. A prospectus was issued by the company which gave a very favourable picture of the likely profits and there were many subscribers for shares in the company. At the first sharcholders’ meeting, the pur- chase of the lease by the company was adopted by the shareholders. The first ship- ‘ments of phosphate were found to be acom- mercial failure. The company was not suc cessful and within six months the original directors were removed and replaced. On dis- covering the true facts, the new directors sought rescission of the contract of sale of the island to the company and repayment of the £110,000 plus interest. Held Rescission of the contract was ordered. The members of the syndicate were promoters of the company and they had broken their fidu- ciary duty, owed to the company, to disclose their interest in the lease together with the Profit they had made on resale. Lord Penzance: *Can a contract so obtained be allowed 10 sland? The bare statement of the facts is, think, sufficient to condemn it. From that statement | invite your Lordships to draw two conclusions: first, that the company never had an opportunity of exercising, through independent directors, a fair and independent judgment upon the subject of this purchase; and, secondly, that this result was brought about by the conduct and con trivance of the vendors themselves. It was the vendors, in their character of promoters, ‘who had the power and the opportunity of creating and forming the company in such a manner that with adequate disclosures of fact, an independent judgment on the company’s behalf might have been formed But instead of s0 doing they usedthatipower | and opportunity for the advanbement bf | their own interests, Placed in this position of unfair advantage over the company which they were about to create, they were, as it seems 1 me, bound according to the princi- ples constantly acted upon in the Cours of Equity, if they wished to make a valid con- tract of sale 'o the company, to nominate independent directors and fully disclose the material facts. The obligation rests upon them to shew they have not made use of the position which they occupied to benefit themselves: but I find no proof in the case that they have discharged that ebligations Lord Cais LC: “In the whole of this proceeding up to this time the syndicate, or the house of Erlanger, as representing the syndicate, were the pro- moters of the company, and it is now nec- essary that I shoud state to your Lordships in what position I understand the promoters to be placed with reference to the company which they proposed to form. They stand, in my opinion, undoubtedly in a fiduciary position. They have in their hands the cre- ation and moulding of the company; they have the power of defining how, and when, and in what shape, and under what supervi- sion, it shall statt into existence and begin 10 fact as a trading corporation. If they are ‘eoing all this in order thai the company may. as soon asi stars into life, become, through its managing directors, the purchaser of the property of themselves, the promoters, iis, in my opinion, incumbent upon the promot: ers to take care that in forming the company they provide it with an executive, that is 00 say, with a board of directors, who shall both be aware that the property which they are asked to buy is the property of the pro: movers, and who shall be competent and impartial judges as to whether the purchase ‘ought oF ought not to he made. I do not sey that the owner of property may not promote and form a joint stock company, and then sell his property to it, but Ido say that if he does he is bound to take care that he sells it to the company through the medium of a 3a | bcalpte hs board of ditdctors who can ad off exprci ‘an independgnt and intelligent judemnt on the trangactipn, and who'are pot feft finder the belief thi the property belongs, hot to the proniotey} but 10 some other j Comment | 1 Erlanger is the leading case on the remedy of rescission, It must be remembered that the remedy will not be available if the usual ‘bars’ to rescission apply, namely, if there has been delay, affirmation, resti- tutio integram is impossible, or if third party rights have been acquired. All seven members of the House of Lords felt that the delay of 14 months in the case was not a bar o rescission. If rescission is not pos- sible then the other available remedies are an account of the secret profit (see Gluckstein v Barnes [1900] AC 240 (below) or, possibly, damages for breach of duty: sce Re Leeds and Hanley Theatres of Varieties Ltd [1902] 2 Ch 809 (below). Farrar, Farrar’s Company Law (4th ed, 1998) at p52, points out that Erlanger was the first case to recognise the existence of a fiduciary relationship between a pro- moter and the company. AS a fiduciary, the promoter owes a duty. essentially, to make full disclosures and avoid making a secret profit, The speeches in Erlanger refer to disclosure (oan independent board of directors but this would not have been possible in the case itself, Subsequent cases. notably Salomon v Salomon & Co Ltd (1897] AC 22, have thus held that dis- closure 10 the shareholders via the prospectus of, in the case of a private company, informal diselosure, will suffice. Finally, the case is a good illustration of the existence of professional promoters who had their heyday during the 1800s, Erlanger himself was a baron and also a Paris banker, an other members of the syn- dicate included a French politician, and English MP, the Lord Mayor of London, a Rear-Admiral and a solicitor. ne Glu lest in'¥ Barnes [1900] AC 240 House of Lords (Earl of Halsbury LC, Lords Macnaghten and Robertson) + A promoter who had broken his duty was liable to account to the company for the amount of secret profits he had made Facts Four members of @ syndicate, including Gluckstein, wished to buy an entertainment hall called Olympis from a company in liqui- ation and then sell it to a company that they would later promote and form. Knowing that the liquidator would have to sell the property they began their scheme by buying up charges ‘on the property at a substantial discount. They then bought the property for £140,000 and out of this sum, the liquidator redeemed the charges in full, making the promoters a £20,000 profit. The next stage was 10 form their company and they became the only directors, The company then agreed to buy Olympia for £180,000. A prospectus was issued inviting the public to buy shares and debentures and Olympia was later sold to the company for £180,000 which was paid for out of the money raised by the issue of the shares ‘and debentures. The prospectus disclosed the £40,000 profit but not the further £20,000 profit that had been made on the charges. Four years later the company went into liquidation and the liquidator now sought an account of Gluckstcia’s share of the £20,000 profit Held The profit of £20,000 made on the charges ought to have been disclosed in the prospec- tus, The fact that the company could not now rescind this contract was no bar to relief and Gluckstein was bound to replace that share of the £20,000 he had received. Earl of Halsbury LC: “My Lords. I am wholly unable to under- stand any claim that these directors, ‘vendors, syndicate, associates, have to retain this money. l entirely agree with the Master 82 off! wi a ire con who they the byt com: oO dou non whi ah, who thos ings pare thes In sup) quai bow: and mad 1 gest cate othe belie else cha and that whe stro) asl ws an is Whe they cone bess duty ny for made juding meat ‘liqui- at they ag that opery harges They nd out sd the ters a form : only © buy ex and tothe forout shares ed the 0,000 ». Pour dation unt of spe stand are of ler. ‘ain ster 1 Prontels of the Rolls that the essence of this scheme was to form a company. It was essential that this should be done, and that they should be ectors of it, who would purchase. The company should have been informed of what was baing done and consulted whether they would have allowed this profit. I think the Master of the Rolls is absolutely right in saying that the duty to disclose is imposed by the plainest dictates of common honesty a3 well as by well seitled principles of common law. OF the facts there cannot be the leest doubt: they are proved by the agreement, now that We know the subject-matter with which that agreement is intended to deal. although the agresment would not disclose what the nature of the transaction was to those who were not acquainted with the ingenious arrangements which were pre- pared for entrapping the intended vietim of these arrangements. In order to protect themselves, as they supposed, they inserted in the prospectus, qualifying the statement that they had bought the property for £14,000, payable in eash, that that did not sell tothe company, ‘and did not intend to sell, any other profits made by the syndicate trom interim invest- ments Then itis said there is the alternative s gested upon the agreement that the syndi- cate might sell to 2 company or to some other purchaser, In the first place, Ido not believe they ever intended 10 sell to anybody else than a company. An individual pur chaser might ask inconvenient questions, and if they orany one of them had stated as aan inducement to aa individual purchaser that £140,000 was given for the property. when in fact £20,000 less had been given, it is great error to suppose that the lew is not Strong enough to reach such a statement; but as Isay, I do not believe it was ever intended to get an individual purchaser, even if such an intention would have had any operation, When they did afterwards sell to acompany, they took very good care there should be no ‘one who could ask questions. They were 10 be sellers to themselves as buyers, and it was a necessary provision to the plan that | j | | and Pre-incorporation Lonlracts 63 they were to be both sellers and buyers, and as buyers to get the money to pay for the purchase from the pockets of deluded share- holders. My Lords, I decline to discuss the ques- tion of disclosure to the company. It is too absurd (o suggest that a disclosure to the Parties to this transaction is a disclosure to the company of which these directors were the proper guardians and trustees, They were there by the terms of the agreement {0 do the work of the syndicate, that is to say, to cheat the shareholders; and this, forsooth, is to be treated as a disclosure to the ‘company, when they were really there to hoodwink the shareholders, and so far from protecting them, were to obcain from them the money. the produce of their nefarious plans. do not discuss either the sum sued for, ‘or why Gluckstein alone is sued. The whole sum has been obtained by a very gross fraud, and all who were parties to itare responsible to make good what they have obtained and withheld from the shareholders.” Comment Lord Macnaghten described the trick practised by the syndicate in Gluckstein, as ‘the old story’ which has been done ‘over and over again’. The company had lost the right 10 rescind as it was in liquidation, so an account of the secret profit was therefore ordered However. recovery of the secret profit is still possible even if the company elects not io rescind the contract, Where, though, the company has los\ the right to rescind and the promoter acquired the property before he became # promoter, then the secret profit cannot be discavered. See Re Cape Breton Co (1885) 29 Ch D 795 (above). Kelner v Baxter (1866) LR 2 CP 174 Common Pleas Division (Erle CJ, Willes, Byles and Keating JJ) + A company was not liable ona pre incorporation contract but the individuals were &364 Company Law Facts ‘The promoters of The Gravesend Royal Alexandra Hotel Co purchased some wines and spirits from the plaintiff, signing the con- tact, “A, B and C on behalf of the Gravesend Royal Alexandra Hotel Company’. The wine was delivered and consumed and the company was later formed but went into liguidation before the wine was paid for. The court had to decide who was liable on the contract. Held A, B and C were personally liable on their agreement, for the price of the wine sold and delivered, The company was not liable as it did not exist atthe time the pre-incorporation. contract was made. Erle Cl: ‘I agree that if the Gravesend Royal Alexandra Hotel Company had been an existing company at this time, the persons who signed the agreement would have signed as agents of the company. But, as there was no company in existence at the time, the agreement would be wholly inop- erative unless it were held to be binding on the defendants personally. ‘The cases referred to in the course of the argument fully bear out the proposition that, where a contract is signed by one who professes to be signing “as agent”, but who has no prin- cipal existing at the time, and the contract, would be altogether inoperative unless binding upon the person whe signed it, he is bound theieby; and stranger cannot by {subsequent ratification relieve him from that responsibility. When the company came afterwards into existence it was a totally new creature, having rights and obligations from that time, but no rights or obligations by reason of anything which might have been done before. It was once, indeed, ‘hought that an inchoate liability might be incurred on behalf of a proposed company. which would become binding on it when subsequently formed; but that notion was manifestly contrary 0 the principles upon which the law of coniractis founded. There must be two parties to a contrct; and the rights and obligations which it creates cannot be transferred by one of thein to a third person who was not in a condition to be bound by it at the time it was made, The history of this company makes this con- struction to my mind perfectly clear, It was no doubt the notion of all the parties that success was certain: but the plaintiff parted with his stock upon the faith of the defen- dants’ cngagement that the price agreed on should be paid on the day named, It cannot be supposed that he for a moment contem- plated that the payment was to be contin- gent on the formation of the company by 28 February [the contract date for payment] The paper expresses in terms a contract to buy, And it is a cardinal rule that no oral evi dence shall be admitted to show an inten tion different from that which appears on the fact of the writing. I come. therefore, to the conclusion thet the defendants, having no principal who was bound originally, oF ‘who could become so by a subsequent rati- fication, were themselves bound, and that the oral evidence offered is not admissible to contradict the writen contract.” Comment All the parties in this case were aware at the time of contracting that the hotel company was not yet formed. The court therefore appears to have assumed that as the company could not be @ party to the contract, the indi- vidual promoters were themselves personelly liable, The case is also authority for the point that its not possible for the company, after formation, to ratify the contraet. This is because the doctrine of ratification has retro- spective effect and requires an existing prin- cipal (the company) at the time the contract is made. Individual liability on pre-incorporation contracis is now govemed by s36C(1) CA 1985. Leeds and Hanley Theatres of Varieties Ltd, Re {1902} 2 Ch 809 Court of Appeal (Vaughan Williams, Romer and Stirling LI) + Damages were awarded for breach of promoters’ duty Fact The mus com pros shar they that com tio mi for pe we or ththe fore vany ndi- ally oint fer ‘ro ais tion CA tof Promoters and Pre-incorporation Contracts 65 Facts ‘The promoters of the company purchased two music halls which they later sold to the ‘company making a profit for themselves. A prospectus inviting the public to purchase shares in the company did not disclose that they were the vendors of the music halls or that they had made the profit, When the company failed, the liquidator sought to make the promoters accountable for the profit Held ‘The promoters had broken their fiduciary duty. The promoters were liable to pay the company damages and the measure of damages was the profit that the promoters had made. ‘Vaughan Williams Li: “There being then this breach of duty, the next question is whether under these cir- ‘cumstances the Theatres Company are now ‘entitled to a remedy as against the company which thus acted in reiaiton to the promo- tion. In my judgment, they are entitled to a remedy, but I think it is « remedy in the nature of damages. To put it ina shor common law form, I am not sure that the ‘Theatres Company can, in reference to this breach of fiduciary duty by their promoters, maintain an action in the nature of an action for money had and received. think the safer ‘way of putting itis to say that their remedy is in damages. The authorities are not all perfectly conclusive that there is no remedy bby way ofan account of profits, but | prefer to say that, whether there is such a remedy ‘or not, Tam clear that there is ¢ remedy in the shape of damages." ‘Comment 1. The remedy of rescission was not avait able because the music halls had been resold, but instead of basing their remedy ‘on liability to account for the secret profit, their Lordships awarded damages. Whether the court is right to de so in suck circumstances tas been questioned by Sealy, Cases and Materials in Company Law (6th ed, 1996) at p36, because it is unusual for a court to award the common law remedy of damages for the breach of apurely equitable duty. If correct, the decision may be of vital importance where the promoter sells prop- erty to a company that he acquired before he became a promoter. If the promoter to disclose his interest in the property he will be in breach of his fiduciary duty However, if the remedy of rescission is no longer available it seems that the courts will not hold the promoter to Account for the secret profit. See Re Cape Breton Company (1885) 29 Ch D 795 (above), 2. In calculating the damages, the court accepted that deductions would have to be made for the expenses of the promotion that inchided redecorating the music halls. The same is true whea calculating the ‘amount of secret profits 3. Finally, it is interesting to note that the promoter of the music hall company was itself a company, and not an individual, Newborne v Sensolid (Great Britain) Lid [1954] 1 QB 45 Court of Appeal (Lord Goddard CJ, Morris and Romer LI) + The pre-incorporation ‘contract’ was a nullity due to the style of signature Facts Leopold Newborne Ltd entered into a contract to sell a quantity of tinned ham to Seasolid, The contract was signed “Leopold Newbone (London) Ls” and undemeath the signature of Leopold Newboume, the promoter and direc- tor, appeared. The market fell and Sensolid refused to take delivery of the goods. Leopold Newbourne Ltd sued Sensolid claiming damages for breach of contcact. While the case was in progress it was discovered that Leopold Newborne Ltd had not been registered as company at the time the contract was made and steps were taken to substitute Leopold Newborne for his company.fr | 6 Compaty tow | ‘ Held pe ' Leopold Newborne did not enter the contract (o sell the ham either as principal or agent. Instead the contract wes purported to be inade by acompany which was not yet in existence by one ofits future directors. The contract was therefore a nullity. Lord Goddard Cl (having referred to the facts of Kelner v Baxter): “They tock delivery of the goods and, there- fore, it was held that as they had contracted con behalf of a principal who did not exist they must, having received the wine, pay for it, That decision seems to me 10 stop far short of holding that every time an alleged company purports to contract — when there is no company in existence ~ everybody who is signing for the company is making himself personally liable, Mr Diplock [connsel for the plaintiff] has also relied strongly on Schmaliz ¥ Avery (1851) 6 QB 655 which lays down a princi- ple, which has been acted on in other eases, notably in Harper & Co v Vigers Brothers [1909] 2 KB 549 that where a person pur- [pons to contract as agent he may neverthe- Jess disclose himselfas being in truth a prin cipal. If he entered into a contract as agent hhe can bring an action in his own name and show that he was in fact the principal. All those cases are well established and we are not departing in any way from those deci- sions any more than did Parker J. What we cannot find in this ease is that Mr Newborne ever purperted to contract to sell as agent or ay principal. ‘The contract was one which he was making for the company, and although Mr Diplock has argued that in signing as he did Mr Newborne must have signed as agent, since the company could only contract through ‘agents, that was not really the true position, The company makes the contract.. No doubt the company must do its physical acts, and so forth, through the directors, but itis not the ordinary case of principal and agent cis a case in which the company is con- (racling and the company's contract is authenticated by the signature of one of the rectors Thig corfrac} pugporth to be a ¢on {Fact by the company;pit urpor to aon fy Hr Mie te nn urpprt.to bd selling|his|goofls but 10 be Sellitg the company's goods. The only, person who had ahy contract here was the company, and Mr Newbome's signature, merely confirmed the company's signature. The document is signed "Yours faithfully. Leopold Newborne (London) Ltd” and then the signature underneath is the signature of the person authorised t0 sign on behalf of the company. In my opinion, unfortunate though it may be, as the compeny was not in existence when the contract was signed there never was a contract, and Mr Newborne cannot come forward and say: ‘Well, it was my contract." The factis, he made a contract for the company which did notexist. Itseems to ime, therefore, that the defendants can avail themselves of the defence which they pleaded and the appeal must be dismissed.* Comment 1. Unlike Kelner v Baxter, the parties to this contract believed that the company was in existence. The style of signature by Leopold Newbourne was interpreted by the court as merely confirming the company’s signature and not that he pur- Ported 10 contract personally as agent or principel. 2. Individual liability on pre-incorporation contracts is now dealt with by s36C(1) CA 1985. In Braymist Lid v Wise Finance Co Lad (2002) 2 AILER 333 it was held that an individual can also enforce pre-incorpora- ‘on contracts under the section, 3. In Phonogram ¥ Lane [1982] 1 QB 938 (see below), the Court of Appeal decided that s36C(1) has made the style of signa- {ure on pre-incorporation contracts irrele- vant. —« | Facts On 24 agent ¢ with D unforn the cor apiece ‘The ant the co formec spent s compa works compa: Held As the the cor compa was bir agreen fresh c« Lopes “The raet Ther man Wall descr comy not it clear hat lence thee: the comp havetion ICA 6Co wan 938 ided j 1 Lil || 1] | c Northumberland Avenue Hotel Co, | Re'(1866)|33 Ch'D 16 Gout: of Appeal (Cotton, Lindley and Lay) I] ‘* A pre-incorporation contract cannot be enforced against a company even if it has ratified or adopted it Facts On 24 July 1882 Wallis, acting through an agent called Nunneley, entered into a contract, with Dolye, who was acting on behalf of the unformed hotel company. Under the contract, the company agreed to take an underlease of apiece of land and to erect buildings upon it. ‘The articles of association purported to adopt the contract and, when the company was formed, it took possession of the land and spent £40,000 on the building works. The company failed to complete the building works and Wallis claimed damages in the company’s liquidation for breach of contract. Held As the company did not eaist at the time of the contract it could not be bound by it, The company wrongly assumed that the contract was binding upon it, but performance of the agreement did not amount to evidence of a fresh contract. Lopes LI “The question is whether there was @ cor: tract between Wallis and the company ‘There no doubt was an agreement between a man called Nunneley, who was agent for Wallis, ané a man named Dayle. who described himself as trustee for the ‘company. Butat that time the company was ‘not incorporated, and therefore itis perfectly clear that the agreement was inoperative as against the company. I is also equally clear that the company, after it came into exis- tence, could not ratify that contract. because the company was not in existence atthe time the contract was made. No doubt the company, afler it came intoexistence, might have entered inio a new contract upon the ! qd Prejinchrpgratton Contratts | 67 mas {he Agreement ofjthe 24th of 1882] and we pre asked to jafer such a trae {rpm fue conduct and transactions aff the confpanp after they came into exis- tehce. It seems to me impossible to infer | such a contract, for itis elear to my mind that the company never intended to make any new contract, because they firmly believed thatthe contract of the 24th of July was in existence, and was a binding, valid contrat. Everything that was done by them after their incorporation appears to me to be based upon the assumption that the contract of the 24 of July, 1862, was an existing and binding contract. I think, therefore, that the appeal ought to be dismissed.” Comment ‘The only way a company can take the benefit or the burden of a pre-incorporation contract is to make a fresh contract after formation, which is known as novation. However, as Northumberland shows, ratification or adop- tion of the contract by performance will not suffice. There must be a new contract. A new contract was found in Howard v Patent Ivory Manufacturing Co (1866) 33 Ch D 156, on the basis that the cash method of payment in the pre-incorporation contract was altered post- incorporation to cash plus debentures. This ‘was held to be evidence of a fresh contract. Oshkosh B’Gosh Inc v Dan Marbel Inc Lid (1988) 4 BCC 442 Court of Appeal (Parker, Nourse and Balcombe LID) * Section 9(2) European Communities Act (ECA) 1972 (s36C(1) CA 1985) could not be relied on where the contract was with a wrongly named company Facts ~ Mr Craze purchased an ‘off the shelf company’ which was incorporated in 1979 tunder the name Ergomight Ltd. A special res- lution was passed in 1980 to change its name to Dan Marbel Inc Ltd but, due to alleged inef- 8t80 Company Law (Jersey) Ltd v Longcrojt (1990| 1 WLR 1390, but in the instant case as Lightman J observed, the prospectus specifically Stated that “as part of the same exercise as allotment, the facility will be available for shares in [D pc} to be dealt with on the USM. Thus, given the purpose for which the prospectus was prepared, the decision is perhaps not tov radical or surprising, Rv Kylsant (1932) 1 KB 442 Court of Criminal Appeal (Avory, Branson and Humphreys J) * A director incurred criminal liability relating to the issue of a prospectus Facts Lord Kylsant, a director of the Royal Mail Steam Packet Co, was charged under s84 Larceny Act 1861 (now 19 Theft Act 1968) with issuing a prospectus which he knew to be false in a material particular, the purpose of which was to invite subscriptions to a deben- ture issue. The prospectus stated the history of the company and the purpose of the issue and proceeded: “The interest on the present issue of deben- ture stock will amount to £100,000 per annum. Although this company, in common ‘with other shipping companies, has suffered {com the depression inthe shipping industry, the audited accounts of the company show that during the past ten years the average anaval balance available (including profits of the insurance fund), after providing for depreciation and interest on existing deben. lure stocks, has been sufficient to pay the interest on the present issue more than times aver. After providing forall taxation, depreciation of the fleet, ete, adding to the reserves and payment of dividends on the Preference stocks, the dividends on the ordi- ary stock during the last 17 years have been as follows...” ‘The prospectus then set out a table of divi dends paid from 1911 to 1927 inclusive, those dividends varying from 5 up to 8 per cent and down to 4 per cent in 1926, but up to 5 per cent in 1927. But, the prospecius did not state that for several years the company had made losses on both its trading and investment income or that the dividends on debentures for those years had been paid out of abnormal income received in the war years (1914-18) which was of a non-recurring nature. The judge directed the jury that the offence could be committed on the basis not only to what the prospectus said but also on what it con- cealed, omitted or implied. Lord Kylsant was convicted and appealed. ‘ Held The appeal was unsuccessful, The offence could be committed where a writen statement concealed or implied information and was not restricted 19 what was actually written Avery I “In the opinion of this Court there was ample evidence on which the jury could ‘came to the conclusion that this prospectus ‘was false ina material particular in that it conveyed a false impression, The Falsehood in this case consisting in putting before intending investors. as material on which they could exercise a judgment as to the position of the company, figures which apparently disclose the existing position, but in fact hid it. In other words, the prospectus implied that the company was in a sound financial position and that a prudent investor could safely invest his money in its deben tures. This inferences would be drawn par- ticularly from the statement that the divi dends ave been regularly paid over a term of years, although times have been bad ~ a statement which was utterly misleading when the fact that those dividends had been aid, not out of current earnings but out of funds which had been eared during the abnormal period of the war, was omitted, His Lordship said that there was ample evidence that Lord Kylsant knew that the Prospectus was false in the sense indicated and that it was not, and could not be, dis- puted that the prospectus was published with the intention of inducing persons to 8s inn He. tot tion whi por: miss Com: 1. Le ch 19 8 2! Th sec reg Smith Serim Mana 769 H Wilki: Slynn * Mea misrop Facts On2ts in Fide of the « two ot false m ‘The tric the bas,sp ale made stment res for iormal 4-18 2. The could > what t con: rt was 1 cement Public Share Offers and Liability for Misteading Prospectuses, 81 inlrust or advance property to the company. He concladed: We come, without hesitation, to the conclusion that the summing-up, regarded as a whole, there was no miscirec: tion, that there was ample evidence on which the verdict of the jury can be sup. ported, and that this appeal must be dis- missed. Comment 1. Lord Kylsant would today have been charged under s19(1) of the Theft Act 1968. This provides: “Where an officer of a body corporate or unincorporated association (or person purporting to act as such), with intent to deceive members or creditors of the body corporate or association about its afairs, publishes or concurs in publish- ing a written statement or account which to his knowledge is or may be mislead- ing, false oF deceptive in a material par- ticular, he shall on conviction on indiet- ment be liable to imprisonment for a ‘erm not exceeding seven years.” There are no reported decisions under this, section. This case is still therefore regarded as the leading authority. Smith New Court Securities Ltd v Serimgeour Vickers (Asset Management) Lid (1996] 4 All ER 769 House of Lords (Lords Browne- Wilkinson, Keith of Kinkel, Mustill, Slynn of Hadley and Steyn) + Measure of damages for fraudulent misrepresentation Facts Qn 21 July 1989 Smith purchased some shares in Fidelity ple for £23 million. An employee of the defendant told Smith that there were two other bidders for the shares, whiich was a false misrepresentation (the “Roberts” fraud). ‘The trial judge awarded damages assessed on the basis of the difference between the price Paid for the shares and the true value of them at the date of the purchase. In doing so, the judge also took into account a second, undis- covered and unrelated fraud. perpetrated on Fidelity (the ‘Guerin’ fraud). The Court of Appeal reduced the damages to £1.1 million and held that the correct measure of damages was the difference between the price paid for the shares, and the price which, in the absence of the misrepresentation and undiscovered fraud, the shares would have fetched, namely, 78p per share. Smith appealed to the House of Lords Held The appeal was successful. The victim of a fraudulent misrepresentation is entitled to damages for all the actual loss, including con- sequential loss, directly flowing from the transaction induced by the deceit of the wrongdoer. The correct measure of damages was £11.3 million, this being the difference between the contract price and the amount actually obtained by Smith on the resale of the shares some nine months later, by which time the second ‘Guerin’ fraud had been discov- ered. Lord Browne-Wilkinson (after reviewing the authorities): “In sum, in my judgment the following prin- ciples apply in assessing the damages payable where the plaintiff has been induced by 4 fraudulent misrepresontation to buy property: (1) the defendant is bound to make feparation for all the damage directly flowing from the transaction; (2) although such damage need not have been for able, t must have been directly caused by the transaction; (3) in assessing such damage, the plaintiff is entitled to zecover by way of damages the full price paid by him, but he must give credit for any bene- fits received as a result of the transaction; (4) asa genera) rule, the benefits received by hhim include the market value ofthe property acquired as at the date of aequisition; but such general rule is riot to be inflexibly applied where to do so would prevent him82 Company Law obtaining full compensation for the wrong suffered: (5) although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the mis- representation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset oF (b) the circumstances of the case are such ._ that the plaintiff is, by reason of the fraud, locked into the property. (6) In addition, the plaintiff is entitled to recover consequential losses caused by the transaction; (7) the plaintiff must take all reasonable steps to mnitigate his loss once he has discovered the fraud.” His Lordship then referred to Downs v Chappell [1996] 3 All ER 344 and Royscor Trust Lid v Rogerson [1991] 2 QB 297 and continued: “How then do those principles apply in the present case? First, there iso dauib that the total loss incurred by Smith was caused by the Roberts fraud, unless it can be said that Smith's own decision to retain the shares Until after the revelation of the Guerin fraud was a causative factor. The Guerin fraud had been committed before Smith acquired the shares on 2] July 1989. Unknown to every- body, on that date the shares were already pregnant with disaster. Accordingly when, Pursuant to the Roberts fraud, Smith acquired the Ferranti shares they were induced to purchase a flawed asset, This is nota case of the difficult kind that can arise where the depreciation in the asset acquired between the date of acquisition and the date of realisation may be due to factors affecting the market which have occurred after the date of the defendant's fraud, In the present case the loss was incurred by reason of the purchasing of the shares which were preg- nant with the loss and that purchase was caused by the Robens fraud, Can it then be said that the loss lowed not from Smith's acquisition but from Smith's decision to retain the shares? In my judg- ‘ment it cannot. The judge found that the shares were acquired as a market-making isk and at a price which Smith would only have paid for an acquisition as a market making risk. As such, Smith could not dispose of them on 21 July 1989 otherwise than ata loss. Smith were in a special sense locked into the shares having bought them for a purpose and ata prive which precluded them from sensibly disposing of them. It was not alleged or found that Smith acted tnreasonably in retaining the shares for as long as they did or in realising them in the mannet in which they did. In the circumstances, it would not in niy Judgment compensate Smith for the actual loss they have suffered (ie the difference between the contract price and the resale price eventually realised) if Smith were required to give credit for the shares having @ value of 78p on 21 July 1989. Having acquired the shares at 821%p for stock Smith could not commercially have sold on that date at 78p. It i not realistic to treat Smith as having received shares worth 7p each when in fact, in real life, they could not commercially have sold or realised the shares at that price on that date. In my judg- ment, this is one of those cases where to give full reparation to Smith, the benefit which Smith ought to bring into account 10 be set against its loss for the total pure price paid should be the actual resale price achieved by Smith when eventually the shares were sold.” ‘Comment 1 ‘This is an important ruling by the Howse of Lords who had to consider for the first time the corfect measure of damages where a plaintiff acquired propecty in reliance on a fraudulent mistepresentation, ‘The actual circumstances of this case jus- tified the House of Lords departing from the normal rule that damages are assessed at the date of the contract, that is when Smith purchased the shares. Holding on to the shares for nine months beiore selling was also held to be justitied because Smith bough! the shares as a ‘market-making risk’, ie with a view ‘0 holding them over a comparatively long period to be sold ata later date. This is insoot first ages lion. jus- from ‘seed vhen ‘fore ified wlo long Public Share Offers and Liability for Misleading Prospectuses &3 contrast to a ‘bought deal’ where the pur- chaser buys with a View to selling them on to clients in small parcels within a matter of hours. Purchasing in this way meant that Smith was “locked into the shares’ so that it was not unreasonable for them to hold on to the shares for as long as they did without selling. Although the case did not involve relianee ‘on a prospectus, the measure of damages ‘would be the same if the plaintiff brought ‘common law action for fraudulent m representation. The measure of damages under s90 Financial Services and Markets Act 2000, which gives a purchaser of shares a statutory right (0 compensation for untrue or misleading prospectuses, is, also tortious, as is the measure under reg 14 of the Public Offers of Securities 1995, for companies with a listing on the Altemative Tnvestments Market.or, if the date. The ind by the mary of + the type ases of the ad of the ued share pany and 8 once in but most egister of npany to apter 14, 1 offence then into be made 40) Gee Iready: be due date later by | by the fee has 4 Alteration of Memorandum of Association and Articles 4.41 Alteration of the memorandum 4.2 Alteration of the articles 4.3 Restrictions on alteration of the articles 4.1 Alteration of the memorandum Introduction In the early days of company law the memorandum was constitution of the company which, unlike its internal to be unalterable in most respects, Practical considera modifications of that approach so that almost every part of the memorandum may be altered under an appropriate procedure It is a legacy of the original status of the ménmioranduns that there is no general power of alteration, such ay applies to the articles (9). For each chiuse of the memorandum it is necessary to identify the relevant provision (iF any) under which it may be altered and adopt that procedure. ‘The method of alter in ils context in this manual as follows: regarded as the permanent culations (the articles), was ons have dictated exiensive tion of the standard clauses of a memorandum is explained 1. the name of the company (see Chapter 2, section 2.2 Change of cumpuny nate): 2, clause stating thar this is a public company (see Chapter 1, section 16 Re- registration of public company as private), insertion of such a -chiuse in memorandum of a private company (see Chapter L. section 16 Re-registration af a private company as public), 3. country in which registered office is to be situated this clause eannor be altered objects clause (see Chapter 2, section 2.3): the authorised capital (see Chapter 6, svetion 6.) Increase uf’ share capital); other chuses which might he included in the articles (see section 4.1 -Alteratinn of uptional clauses of the memorandum), i IDa Alteration of Memorandum of Association and Articles Alteration of the objects As already exphiined (see Chapter 2, section 2.3 The ultra vires principle and CA 1989) it is normal procedure to consider whether the objects clause in its: present form suffices before launching the company into a new venture or a novel type of, transaction. If there is any doubt the company then alters its objects clause to incorporate suitable main objects or powers A company may by special resolution alter its memorandum with respect to the objects clause: st. ‘This simple provision replaces a more elaborate statement of the limit and specified purposes for which alteration was permitted. It is normal commercial practice to alter the objects whenever an existing or | contemplated change in the nature of the company’s business or a particular transaction is not sufficiently authorised by the existing objects and related powers A bank for example would wke legal adviee on the objects clause of a company customer which had asked for a substantial loan and insist that any alteration was made, which its advi , before making the loan. If it did not take this precaution its ‘good faith’ (Chapter 2, section 2.3 Validity af transactions) might be questioned if it later had to rely on s35A. The primary safeguard against an injudicious or improper alteration of the | objects is the three quarters majority of votes cast which is required to carry a special resolution. With the new simple procedure for altering the objects clause by special resolution it is unlikely thar any member would object to procedural faults. However it is @ possibility though, for reasons explained below, the right to abject to the court . is restricted to the period of 21 days following the passing of the resolution: s6(4), A minority, who did not vote for the resolution, may object to the alteration on its merits but only within the same perind of 21 days, ‘The minority must be 15 per cent (by sharcholding) of the holders of the issued share capital or a class of or of a class of debentures giving a right of objection, (This last category, preserved by CA 1948, is now virtually obsolete, ie few if any such debentures now exist: 6§(2) and (3).) ‘The reason for the 21-day time limit in cither of these cases is that, after altering its objects, the company will probably proceed with the transaction which made the alteration necessary, If there is going to be an objection, it must be raised and decided within « short period, so that the altered objects are thereafter secure from challenge, Objections to the merits of the shteration are rare since it is not easy: for a minority to satisfy the court that a change which is approved by a substantial us law however a few successful objections were ers deemed necessat t least majority is unwise, Under the pre made on the ground that the new objects were ‘destructive or inconsistent with the caisting business’: Re Parent Tyre Cv [1923] 2 Ch 222 and Re Cyedisis’ Towing Club [1907] 1 Ch 259. Buc if the company entirely changes the nature of its business, itand CA Is present el type of clause to eet to the limit and sisting or particular J powers company ation was did not sniactions) a of the > carry al y special However the court s0(4), ration on ve at least a chass of category, ures now P altering, made the vised and ure from: sy for a ibstantial with the ring Club siness, it Alteration of the articles 75 will usually alter its objects cluse so as to omit the previous objects and thus obviate any inconsistency In its application Co the court a 15 per cent minority usually seeks cancellation of the alteration. However, the court may impose or promote other forms of settlement such as the purchase by the company of the objectors’ shares or an order for alteration of the memorandum or articles or to entrench some part of the existing memorandum or articles so that it may not thereafter be altered except by leave of the court A copy of the memorandum in its altered form must be delivered to the registry ‘The company first waits 21 days to see whether any application will be made to the court to cancel the alteration (or to declare it invalid), If no such application is made the company then has 15 days trom the end of the 21-day period in which to file the altered memorandum. If there is an application, the 15 days runs from the time when it is disposed of. Alteration of optional clauses of the memorandum ave been contained in ight of Any condition contained in the memorandum which might the articles may be altered by special resolution, but subject to the same minority objection to the court, as applies to alterations of the objects: $17(1). However, this provision for alteration is subject to the following restrictions and exclusions: 1, the company may not alter any part of the memorandum which is subject to a court order for minority protection under ss459-461 (see Chapter II, section 11.2 The court's powers); 2. it may not require a member, unless he consents, to subscribe more for his shares than was due when he became a member nor compel him to subscribe for additional shares: s16; 3. the power does nor permit ale is declared in the memorandum 10 be unalterable, In any such case alteration can only be made by a scheme of arrangement (sce Chapter 12, section 12.2) for which court approval is required: 4. for any variation of the cliss rights attached to shares the correct procedure (see Chapter 3, section 3.1 Hartatin of chess rights — procedure) must be followed. Iv is excluded from the seope of $17 sation of any ‘entrenched? provision, ie one which Section 17 is more important for ity exceptions than for its powers 4.2 Alteration of the articles Apart from having entered into membership of the company in reliance on the statements of the objects and powers in the memorandum of association, the{ 1 \ \ 76 Alteration of Memorandum of Association and Articles shareholder becomes 4 member on the terms of membership contained in the articles of association, Just as the memorandum may be altered, so as to redefine the aims and capacity of the company of which they are all members, so may the articles be ied, to alter the tights and relationships of the various members inter se. 4 Power to alter the articles is given to the company by s9, which states: d (1) ‘Subject to the provisions of this At and to the conditions contained in its memorandum, a company may by spevial resolution alter or adel to its articles, (2) Any alteration oF addition So made in the articles shall, subject to the provisions of this Act, be as valid Iy contained therein, and be subject in like manner to alteration by special resolution.” In addition the court has power in certain circumstances, such as an alteration of e objects to which objection has been raised (s5(3)), and the grant of a remedy toa 9-461, to order that the articles shall be altered or alternatively the minority under ss: that some existing provision of the articles shall not be altered without the leave of the court. Phere are a number of restrictions on the general power of a company: to alter its articles. It must respect any prior order of the court (see above), The articles may not be altered so as to conflict with the memorandum or with the Companies Act 1985. An attempt, for example, to shorten the period of notice of general meetings to less than 21 or 14 days (see Chapter 8 section 8.1 Notice of meetings) would be invalid because $369 overrides it. As with the memorandum (see section 4.1 Alteration of ptional cluases of” the niemorandum) no alteration of the articles may increase the liability of a shareholder ow hiy shares without his consent: $16. 4 ‘The rights attached to-a chiss of shares, defined by the articles, may at the final be varied by altering the articles. But the proper prior procedure (see Chapter 3, section 3.1 Fariatio of class rights — procedure) must be followed to obtain any necessary consent before the alteration is mace: $125, Unlike the memorandum, honever, the articles may not aay ty make it unalterable. Devices such as prescribing a kirger majority of vores than the three quarters required to special resolution, or eatry into a contract by which the company agrees not to alter its articles are simply invalid However, in Russell Northen Bank Development Corporation Lid (1992] 1 WLR 588, while accepting the principle that *a company cannot forgo its right to alter its articles’ enunciated in Southern Foundries (1926) Ltd v Shirlam [1940] AC 701, the House of Lords affirmed that an agreement outside the articles between shareholders as % how they would exercise their voting rights on a resolution to alter: the articles was ‘aot necessarily invalid, In Ruswelf it appeared that ‘Tyrone Brick Ltd (PBL) and its four shareholders had entered into an agreement, inter alia, that ‘No further share capital shall be created or issued in the company or the rights attaching to the shares al issue in any way altered ... without the writien consent of each of the parties hereto.’ Expressing the views also of the other Law Lords, Lord Jauncey of Tullichettle said: ‘entrench’ any article so yinRestrictions on alteration of the articles in the arti sfine the aims the articles be Se. 133 the contract constituted by the articles of association between the members of the company inter se. But where on the footing of that article the directors are employed by the company and accept office the terms of art 62 are embodied in and form part of the coniract between the company and the directors, Under the article as thus embodied the ditectors obtain a contractual ight to an annual sim of £1,000 as remuneration ... It isnot due to them by their being members of the company, but under a distinct contract with the company. The claim must therefore be allowed.’ Comment The directors were ouisiders and s0 could not rely on the s14 contract. However, the court looked to the articles to supply the missing term relating to remuneration into their extrin- sic agreement. In this way the directors ‘obtained a contractual nght implied from the icles in an outside capacity. Where the terms of an article are implied into 2 contract in this way they will be taken to be alterable under 9 CA 1985 in the usual way, but not retrospectively. See Swabey v Port Darwin Gold Mining Co (1889) 1 Meg 385. Punt y Symons & Co Ltd (1903) 2 Ch 506 Chancery Division (Byrne J) + A company cannot contract out of its statutory right to alter its articles Facts ‘The company was formed in 1898 to acquire and carry on a furniture business then carried on by Mr GG Symonds. The articles appointed him as the governing director with very full powers of management and also gave him the right to appoint and remove directors. In the event of his death hiy irusices were given the same powers. Furthermore, the agreement between Mr G G Symonds and the company for the sale of the business provided, in cl6, that the company will not do anything to alter the articles. After his death disputes arose between Symonds’ trustees and the [27134 Company Law other two directors. After issuing additional shares to their supporters, a special resolution ‘was passed altering the relevant articles so as to deprive the trustees of their management powers. The trustees sought an injunction pro- hibiting the company and its directors trom holding an extraordinary general meeting to confirm the lteration, Held ‘The company could not contract itself out of its statutory right to alter its articles either by anagreement inside the articles or in an agree- ment which is independent of the articles, The injunction was granted but on the ground that the directors had not issued the additional shares for the benefit of the company but to secure the necessary voting majority. Byrne J: “The first point taken is that passing the res- olution would be a breach of con:raet which was entered into with the testator; and the plaintiffs as executors are entitled to enforce the terms of the agreement by restraining any alteration of the articles, 1 think the ‘answer to this argument is that the company cannot contract itself out of the right to alter its articles though it cannot by altering its articles, commit a breach of contract. It is well established as berween a company and 4 shareholder, the right not depending upon & special contract outside the articles, that this is the case. It has not been, so far as 1 know, the precise subject of reporied deci- sions, as between a contractor anda ‘company, where the contract is independent of and outside the anicles His Lordship then referred to the judgment of Lindley MR in Allen v Gold Reefs of West Africa (1990) 1 Ch 656 and to a note of an unreported decision Re Ludies’ Dress Association Lud where the company issued ten ‘founder's certificates which stated that the company would not alter or vary the articles without the written consent of the holder. The Court of Appeal dismissed the case on the ground that such a covenant could not be sued upon. He then continued: Ce L “That appears, so far as can judge, to be a decision on the point now before me Whether that be so or not, Iam prepared to hold that inthe circumstances of the present ease the contract could not operate 10 prevent the article being altered under s50 of the Companies Act, 1862, whatever the result ofthe alteraion may be. It may be that the effect of an alteration after a contract is retrospective. It may be thatthe remedy isin damages only, orit may be that the stipula- tion of the contract can be enforced natwith- standing the alteration of the articles. [think thatthe result of the alteration depends upon the special circumstances in each case, but, speaking generally, and without saying that there may be be some exceptions, any ills tration of which does not at present occur to me, I consider thai the principle of the decision in Allen v Gold Reefs of West Africa {1900} | Ch 656 applies to a case between the company and an outside party on a separate contract, as well as to.a case { between a company and a shareholder on the contract contained in the anicles, and that it applies in the present case.” ‘omment ‘This case established the principle that a company cannot, by a separate egreement, contract out of its power to alter the arti- cles under s9 CA 1985, Byme J refused to grant an injunction restraining the company from altering its articles in such circumstances, but appeared to suggest that damages were available. In British Murac Syndicate Ltd-v Alperton Rubber Co Lid (1915}2 Ch 186 an injunc- tion was granted 10 prevent a company from altering its articles. In that case however Sargant J, by mistake, treated Punt v Symons & Co Ltd as having being ‘overruled by the Court of Appeal in Baily V British Equitable Assurance Co Lid [1904} 1 Ca 374, ‘The recent House of Lords decision in Russell v Northern Bank Development Corporation Lid [1992] | WLR 588 (see below) decided that an agreement by the an Fact: Antic ciatio totra who them fl inten Whe onde: Held The« also both cape order cont sear joini ings Vais i the the cle lik rel ho ais 19 wl Higcompany not to alter its articles is invalid ‘and cannot be enforced by an injunction or damages. In the light of Russell the sug- gestion that damages may be available can no longer be treated as correct. Rayfield v Hands {1960} 1 Ch 1 Chancery Division (Vaisey J) * The articles constitute a contract between the members inter se Facts Article 11 of the company’s articles of asso- ciation provided, “Every member who intends to transfer shares shall inform the directors ‘who will take the said shares equally between them at a fair value’. In April 1955 the plain: ‘iff notified the defendant directors that he intended to transfer his 725 shares to them. When they refused, the plaintiff sought an onder that they should do so, Held The order was granted, As the directors were also required to be members, art 11 affected both the plaintiff and the directors in their capacity qua members, The directors were ordered to buy the shares as $14 CA 1985 has contractual effect between the members inter se and can be enforced by a member without Joining the company as a party to the proceed- ings. Vaisey J: “The next and most difficult point taken by the defendants as to which it would appear that there is na very ciear judicial authority, is thatart 11. as part of the company’s art cles of association, does not do what it looks like doing, that is. to create a contractual relationship between the plaintiff as share holder and vendor and the defendants as directors end purchasers. This depends on S20(1) oF the Companies Act 1948 [s14 CA, 1985} Now the question arises at the outset whether the terms of art I relate to the rights of members inter se (that being the The Articles of Association, 135 ‘expression found in so many of the cases), or whether the relationship is between a member as such and directors as such. I may dispose of this point very briefly by saying thst, in my judgment, the relationship here is between the plaintiff asa member and the defendants not as directors but as members. In In re Leicester Club and County Racecourse Co (1885) 30 Ch D 629 at 633, Pearson J, referring to the directors of a company said that they “continue members of the company, and I prefer to call them working members of the company”, and on the same page he also ssid: “directors cannot divest themselves of their character of members of the company. From first to last ... they are doing their work in the capacity of members, and working members of the company ..." I am of the opinion, therefore, that this is in words a contract or quasi-contract between members, and not between members and directors. I have now to deal with the point for which there is considerable support in the cases, that the notional signing and sealing of the articles creates a contractual relation between the company on the one hand and the comporators (members) on the other, so that no relief can be obtained in the absence of the company as 2 party to the suit... In the general ciscussions on the effect of 820 to be found in the cases, I have, of course, considered the disseationt speech of Lord Herschel! in Welzon v Saffery (1897] AC 299, and the comprehensive review of the earlier authorities by Astbury J in Hickman v Kent and Romney Marsh Sheepbreeders’ Association {1915} 1 Ch 881, Among the numerous dicta in the judp- ‘ment ia that case, one which seems to me to bbe helpful and convincing is the one which reads as follows: “the articles of association are simply a contract as between the share- holders inter se in respect of their rights as shareholiers, They are the deed of pariner- ship by which the shareholders agree inter On the whole, if the proper way to con- strue the articles of association of a company is as a commercial or business document to which the maxim “validate if 12.9136 Company. Law possible” applies. | think that the plaintiff in this action ought to succeed, Not one of the judges in the case 10 which I have already referred, Dean v Prince [1954] Ch 409, showed any signs of shock or surprise in the assumption there made of a contract beiween directors being formed by the terms of acompany’s articles. I am encouraged, not [hope unreasonably, to find in this ease @ contract similarly formed between 8 member and member-cirectors in relation to their holdings of the company's shares in its articles, The conclusion to which I have come may not be of so general an applica- tion as to extend to the articles of association of every company, for itis, think, material to remember that this private company is ‘one of that class of companies which bears & close analogy to @ partnership: see the well- known passages in In re Yenidje Tobacco Russell y Northern Bank Development Corporation Ltd |\992} 1 WLR 588 House of Lords (Lords Griffiths, Jauncey of Tullichettle, Lowry, Mustill and Slynn of Hadley) + A shareholders’ agreement not to increase the share capital of the company was valid and enforceable Facis In 1979 Tyrone Brick Ltd (TBL) and its four shareholders had entered into a shareholders’ ‘agreement that provided ci 3 that ‘no further share capital shall be created or issued in the company or the rights attaching to the shares already in issue in any way altered ... without the written consent of each of the parties Co [1916] 2 Ch 426 hereto." In 1988 the board of directors gave : Nobody, I suppose, would doubt that ¢ notice to the shareholders of an extraordinary ‘ partnership deed might validly and properly general meeting to be held a! which a resolu- provide for the acquisition of the share of tion to increase the share capital was to be Me one partner by another partner on terms considered, One of the shareholders, Russell ere identical with those of art 1] in the present sought an injunction resiraining the other righ case. Ido no intend to decide more in the shareholders from voting upon the resolution, a present case than is necessary 0 support my The trial judge and the Northern Ireland Court Mi conclusion, though it may be that the prin- of Appeal dismissed the case as the agreement ‘aur ciples upon which my conclusion is founded —_Fettered TBL's statutory right to increase its ag are of more general application than might share capital under the equivalent of $121 CA pe be supposed from some of the authorities 1985, Russell appealed to the House of Lords agi nthe point sec Held Mi Comment ‘The appeal was allowed and a declaration was ea The articles required the directors to hold qual-grarsed that clause was valid, While accepting ot ification shares. This was convenient because é the principle that ‘a company cannot forgo its right to alter its articles’ (see Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701), an agreement outside the articles between sharzholders as to how they will itallowed Vaisey J to classify the dispute as being between members, rather than between a member and the directors. Ifthe plaintiff had just been a director the decision would pre- is Firs shi sumably have. been different. This first cyercise their voting rights on a resolution to 1 instance decision is probably not strong alter the articles is not necessarily invalid cor enough io say beyond doubt nat si4 creates @ Here, the company’s undertaking gas unen fe ‘contratt between the members iner se forceable, but not that of the shareholders, an Lord Jauncey of Tullichettle: a “The issue between the parties in this House ae ‘was whether art 3 of the agreement consti tuted an unlawful and invaltd fetter on the ae 130statutory power of TBL to increase its share capital or whether it was no more than an agreement between the sharcholders as to their manner of voting in a given situation, Both parties accented the long established principle that “a company cannot forgo its Fight to alter its articles”: Southern Foundries (1926) Lud v Shiriaw [1940] AC 701, 739 per Lord Porter. A principle that was earlier stated in Allen v Gold Reefs of West Africa Ltd {1900} 1 Ch 656, 671 per Lindley MR the company is empowered by the statute to alter the regatations contained in its articles from time to time by special resolutions (880 and 51 fof the Companies Act 1862}); and any regula- tion or article purporting to deprive the company of this power is invalid on the {ground that itis contrary to the statute: Walker v Lamion Tramways Co (1879) 12 ch 705~ Murray J and MacDermott LJ both consid- cred that this principle applied also to the sight of a company to alter its memorandum and J agree that this must be the case. Mr MoCartney for the plaintiff advanced a number of arguments to the effect that the agtcement in no way contravened the above Principle in as much as it was merely an agreement between shareholders outside the scope of company legislation which in no way fettered the statutory power of TBL to alter its memorandum and articles. Mr Girvan [counsel for the respondents}, on the other hand, submitted that the agreement was not only a voting arrangement between shareholders inter se but was tantamount to an article of association which constituted a restriction on the power of TBL to alter its share capital My Lords while a provision in a company’s articles which restricts its siatu- tory power to alter those articles is invalid an agreement dehors the articles between sharcholders as to how they shall exercise their Voting righis on a resolution to alter the articles is not necessarily s0. In Welton v Saffery [1897] AC 299, 331, which con- cemed an ultra vires provision in the articles The Articles of Association + 137 — of association authorising the company to issue shares at a discount, Lord Davey sai “Of course. individual shareholders may deal with their own interests by contract in such way as they may think fit, But such contracts, whether made by all or ———-— some only of the shareholders, would create personal obligations, or an exceptio personalis against themselves only, and would not become a regulation of the company, or be binding on the transfer~ es of the parties to it. or upon new oF non-assenting shareholders, There is no suggestion here of any such private agree- = ment cuiside the machinery of the Companies Acts. Tunderstand Lord Davey there to be aceept= ing that shareholders may lawfully agree inter se to exercise their voting righis in a manner which, fit were dictated by the arti> ———— les, and were thereby binding on the company would be untawful, Tturn to examine the agreement in more———— detail, It appears from the narrative clauses that the agreement was intended to regulate the relationship between the shareholders. -—— with regard to the management and control of TBL, Clause 1 provides thatthe terms of the agreement shall have precedence “hetween the shareholders over the articles of association” (the emphasis is mine). It further provides that where there is a con-—— flict between the provisions of the agree- ment and the articles partes shell co-operate where necessary to have the articles amended to take account of the provisions of the agreement. If further provides thet no further share capital shall be created or issued in TBL without the written consent of the pares to the agreement. TBL wasincer= porated under @ previous name on 13 July 1979 and the agreement was executed on 14 December of that year. Since that date no——— attempt has been made to amend the articles, for the purposes of cl 1 but I do not find that in any way surprising because cl 3 affects ———— only existing shareholders and does not purport to bind other persons who may at some future date become sharcholders in —— ‘TBL by allotment or transfer. Clause 3 at least so far as shareholders are concerned 13)138 Company Law constitutes an agreement collateral to the provisions of reg 44 of Table A and is, as MacDermott LT has concluded, neither in substitution for norin conflict with that reg- ulation However, it must be remembered that the agreement was executed not only by the shareholders but also by TBL. In Bushell v Faith (1969) 2 Ch 438 one of the articles of a private company provided thatin the event of a resolution being proposed ata general ‘meeting of the company for he removal of &

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