Question 7 May 2009

You are a Research Assistant to the presiding judge in the High Court. The following matters
have arisen in a trial:

a) The circumstances in which the court will lift the corporate veil of a company; and

b) The grounds upon which the court may make a winding-up order.

Provide a written opinion for the judge on these matters.

OPINION

a) The circumstances in which the court will lift the corporate veil of a company.

A company is regarded as a person or entity distinct and apart from the shareholders who
comprise it. That is to say, the company is a person with a capacity to enter contracts,
sue, be sued and in all respects act an individual: Saloman v. Saloman and Co; Section
17 (1) of the Companies Act CAP 308 ("the Act").

The general principle underlying the existence of corporate personality is that the court
will not, unless in exceptional circumstances, pierce or lift the corporate veil thereby
disregarding the separate corporate existence between the company and its shareholders.
Therefore, generally, the law will not go behind the separate personality of the company
to its members.

The learning in recent case law and in the Companies Act CAP 308 suggest that the court
may allow the piercing of the veil:-

1. Where the company is a sham or cloak for illegality – Jones v Lipman where the
Defendant had entered into a contract to sell property, but then sought to avoid the
sale by transferring the property to a company which he controlled. Russell J held
that specific performance could be ordered against the company, which he
described as “the creature of the First Defendant, a device and a sham, a mask
which he holds before his face in an attempt to avoid recognition by the eye of
equity”.
 Similarly in Gilford Motor Company Ltd. v Horne the Defendant had been
managing director of a the Claimant company, and had entered into a covenant
not to solicit customers from his employers when he ceased to be employed by
them. On leaving the company’s employment, Horne formed a company to carry
on a competing business, the shares in which were held by his wife and a friend,
and he thereby solicited the Claimant’s customers. The Court of Appeal held that
this company was a mere façade or sham to cloak his breach, and granted an
injunction to enforce the covenant against both Horne and the company.

2. Where the assertion of separate corporate personality amounts to a breach of an

implicit contractual provision or statutory policy – Income Tax Act s.29 (1) notes
that where on a transaction of purchase and sale to which a person carrying on
business in Barbados is a party

a. the vendor controls the purchaser; or

b. the purchaser controls the vendor; or

c. the purchaser or the wife of the purchaser is a relative of the vendor or the
wife of the vendor,

with the effect that the transaction does not take place at arms' length and the
price is other than the fair market value, then, in calculating the assessable
income of the vendor or the purchaser from carrying on business in Barbados, the
transaction shall be deemed to have taken place at a price equal to the fair
market value.

(2) Where the main purpose of a transaction is the artificial reduction of the
assessable income of a person, then, in calculating the assessable income of the
persons participating in the transaction and solely for the purposes of this Act
and other enactments relating to income tax, that transaction shall be disregarded
or shall be deemed to be modified, whichever is more appropriate to achieve the
 effect that the transaction no longer results in an artificial reduction of the
assessable income of that person.

3. Where there is compelling evidence of shareholder fraud – In Trustor AB v

Smallbone (No.2) the defendant Smallbone had effected the payment of
considerable sums of money from Trustor AB, a company of which he was
managing director, to a company called Introcom, which he controlled. Sir
Andrew Morritt V-C found that Introcom was simply a vehicle for receiving the
money, and that the payments were made in breach of Smallbone’s duty to
Trustor. Summary judgment was ordered against Smallbone and Introcom.

4. Where statute permits –

a. Companies Act s.433 - (2) Where the person who is guilty of an offence
under subsection (1) is a body corporate, then, whether the body
corporate has been prosecuted or convicted, any director or officer of the
body corporate who knowingly authorised, permitted or acquiesced in the
act or omission that constituted the offence is also guilty of an offence and
liable on summary conviction to a fine of $5 000 or to imprisonment for a
term of 6 months, or to both.

b. Companies Act s.434 (2) - When a company is guilty of an offence under

this section, any director or officer of the company who knowingly
authorised, acquiesced in or permitted the contravention is also guilty of
an offence and liable on summary conviction to a fine of $5 000, or to
imprisonment for a term of 6 months, or to both.

5. When it can be established that the company is an authorised agent of its

controllers or its members, corporate or human: Adam v Cape Industries plc;

6. Where a subsidiary company is wholly owned by a holding company: DHN Food

Distributors Ltd v London Borough of Tower Hamlets Ltd.

The conclusion is that the court is reluctant to pierce the veil and unless there is concrete
evidence as to the points above the veil will remain intact rather than in tatters. In Ord & Anor
v. Belhaven Pubs Ltd the Court of Appeal has decided that the decision in Creasey v
Breachwood Motors was wrong. In that case Creasey was dismissed from Breachwood Welwyn
Ltd. and in order to avoid paying Creasey damages in a suit brought against them they opened
Breachwood Motors Ltd and transferred all of the assets from Breachwood Welwyn Ltd to
Breachwood Motors and wound up the former company. In Ord the defendant company had
made various misrepresentations to the claimant. By the time these came to light, the company
had all but ceased trading, and had negligible assets. The claimant sought to substitute the
defendant company’s holding company, and the judge at first instance followed Creasey and
allowed the substitution. The Court of Appeal decided that this was incorrect, as the original
company had not been a mere façade for the holding company, nor vice versa. Unlike the new
company in Creasey, neither company had not been created as a sham to avoid some liability,
there had been no element of asset stripping and so the veil should not be lifted.

b) The grounds upon which the court may make a winding-up order

The presiding judge in the High Court is advised that an application for an order to wind
up a company may be made either by the company itself, the directors, the shareholders
or a creditor. The Companies Act specifies the grounds which a company may be wound
up by the court on such an application. According to section 355 of the Companies Act
Chap 81:01, the court may make a winding-up order on, inter alia, any of the following
grounds:

(i) The company has resolved by special resolution to be wound up by the courts;

(ii) The company has not commenced its business within a year from its incorporation
or has suspended business for a whole year;

(iii) The company is unable to pay its debts;

(iv)The members of the company has been reduced to below two (2);

(v) The court is of the opinion that is just and equitable that the company should be
wound up.
Of the above, the most important of these grounds is that the company is unable to pay its
debts, and most important, the court is of the opinion that it is just and equitable that the
company should be wound up.

Inability of a company to pay debts

A company is deemed unable to pay its debts if:

(a) a creditor, to whom the company is indebted to in a sum exceeding $5000 then due,
has served on the company a written demand requiring the company to pay the sum so
due, and the company has for three weeks thereafter neglected to pay the sum or to secure
or compound for it to the reasonable satisfaction of the creditor;

(b) a judgment against the company is unsatisfied; or

(c) it is proved to the satisfaction of the court that the company is unable to pay debts as
they fall due.

A company is also deemed unable to pay its debts if it is proved to the satisfaction of the
court that the value of the company's assets is less than the amount of its liabilities, taking
into account its contingent and prospective liabilities.

The court will only make a winding up order if the petitioner genuinely seeks an order to
recover the debt. Accordingly, the court may decline to order a winding up if the petition,
in the court's view, is presented to coerce the company into satisfying some groundless
claim or if the company has a meritorious defence to the claim or if the object is to wreck
the company's business in favour of a competitor. The court will also dismiss a petition
which misstates the facts or deliberately misrepresents the position or is silent in respect
of relevant material: Re A Company.

Winding up on the just and equitable principle

Notwithstanding that there is a judgment debt which has not been satisfied the court will
only make the order for winding-up the company if it is just and equitable to do so. The
court will therefore be exercising a wide discretion when it so orders that a company be
wound up. The court's power to wind up on the just and equitable principle has been
exercised where:

(i) the substratum of the company has disappeared, that is, the company has abandoned
its principal objectives for which it was formed: Re German Date Coffee Co.; or the
company acts in a manner which is entirely outside the general intention and common
understanding of the members when they became members: Re Tivoli Freeholds Ltd.

(ii) the company is formed for fraudulent purposes: Re T. E. Brinsmead & Sons;

(iii) there is a deadlock at board level so that there is a justifiable lack of confidence in
the management of the company's affairs: Loch v John Blackwood Ltd.;

(iv) the company is carrying on its business at a loss: Re Factage Parisien Ltd;

(v) there is oppression towards the minority shareholders: Rand Air (Pty) Ltd. v Ray
Betes Investments (Pty) Ltd.

It may even be just and equitable to wind up a company even though the controllers have
acted within their strict legal rights: Ebrahimi v Westbourne Galleries Ltd. However, it
must be noted that a winding-up order will be refused if a petition is brought for an
extraneous or improper purpose: Re Surrey Garden Village Trust Ltd.

Case law has suggested that the court, in exercising its discretion whether to wind-up the
company, will take into consideration the size of the debt, because if it is a relatively
small debt in relation to the company's assets and it is proved that the company can
satisfy the debt within a reasonable time the court is likely not to make an order. The
court will also consider the industry that the company is in and if it is a company that
may have detrimental repercussions if wound up the court will not make an order. Also,
the court may be inclined to look at the level of dislocation of the employees as a result of
the winding up order. However, the court cannot exercise a discretion to refuse a
winding-up order because the closure of the company's business will put its employees
out of work or because the public generally has some interest in the continuation of the
company's business: Re Craven Insurance Co. Ltd.
Question 9 August 2011

You are a Research Assistant to the presiding judge and you are asked to prepare a written
opinion on the following -

a) The Rule in Foss v Harbottle;

b) The circumstances in which the court will make a compulsory winding up order.

Prepare the opinion.

Part B answered above I first question, basically was asking the same question.

OPINION

a) The Rule in Foss v Harbottle

At common law, minority shareholders who are unhappy with a decision of the majority
can bring an action only where the decision is:

(i) illegal or ultra vires;

(ii) the member's personal rights are being infringed; or

(iii) where the act constitutes a fraud on the minority.

These remedies, however, may only be sought by the company. This is the general rule as
laid down in Foss v Harbottle. In Foss v Harbottle two shareholders brought an action
alleging that land has been sold to the company at an exorbitant price. They brought the
action on behalf of themselves and all other shareholders except the defendants. It was
held that the conduct complained of was a wrong done to the company and that only the
company could sue.

To this rule, there are exceptions. In Edwards v. Halliwell, four exceptions to the general
rule in Foss v Harbottle were identified. The exceptions are as follows:

(i) Where the act complained of was ultra vires: Russel v Wakefield
Waterworks Co.

(ii) Where there was fraud on the minority: Menier v Hooper's Telegraph
Works. The minority shareholders are allowed to bring what is known as a
derivative action on the basis of fraud and control on the part of the
wrongdoers. It must be noted that mere negligence is not considered fraud
on the minority: Pavlides v Jenson.

(iii) Where the act complained of was a violation of a requirement in the

articles for a special majority: Daniels v Daniels. If the matter could only
be sanctioned by a special majority, then a member could sue if only a
simple majority attempted to sanction the matter; and

(iv) Where the act complained of was an invasion of member's personal rights
as members: Pender v Lushington.