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Company Law

Long Notes
Class Revised
A. Company in Context
Legal forms of business organizations:
company- sole proprietor partnership (1. ordinary partnership 2. limited partnership)
Lts Partnerships Act 2008 trust

B. Company Law
1. Sources of Company Law
1.1 English Roots
NZ Companies Acts 1908, 1933 and 1955 mirror English Acts of 1908, 1929 and 1948.
Thus, English Company law cases = very persuasive source of law in applying NZ legislation
AUS persuasive as they adopted the English model of company legislation

2. THE NATURE OF THE COMPANY


2.1 Corporate Personality Common law (CoLNZ Ch 2)
A Company is a separate legal entity in its own right, separate from any other legal
person s15 + 16 Co's Act
company is separate from shareholders, Directors, creditors
Company is separate from underlying shareholders (Salomon v Salomon)
has full rights, powers and privileges
A company can limit its rights per ss 15, 16.
e.g. B&J Ice cream 10% income reinvested into community
Powers of a company cannot be enlarged beyond ss15, 16 - per s16(2)
(e.g. director of a company cannot be a company themselves Co Act 1973; Co cannot
marry)

A Company has capacity:


to undertake things business/activities, enter contracts and transactions,
but also subject to legal rights or duties as any other legal person

Salomon v Salomon 1897 AC 22 (HL)


Family shoe making business family workers wanted
share of business
director turned sole trader business into a limited
liability company i.e. incorporated the co and

transferred the shoe business into it


Company paid for the business transfer by lending the
shoe business money, and secured payment for that
money through a charge/debiture for the company
meaning the director ranked ahead of unsecured
creditors as he was secured. i.e. once the company was
placed into liquidation, it's assets would be sold by a
liquidator and used to pay off the companies creditors
the secured creditors rank first
Salomon (director) held all except 6 shares, the
remainder held by his family workers one share each.
Shares were distributed like this as the legislation at the
time required minimum number of shareholders to be a
recognised company
As managing director Salomon controlled the other
shareholders they were 'dummies'
Business failed assets were insufficient to pay
unsecured creditors. Secured only got some money
back.
Key argument that the company was acting as
the agent of Salomon, so any debts that the
company incurred he was to indemnify - ie. Mr
Salomon was to pay unsecured creditors
2 strands of argument:
1) agency that Mr S had such control, as
manageing director, controlling shares, as a
trustee 2) the company was a sham company was an
alias for Mr S (collapsing the distinciton between
shareholders and company) or as a mere scheme
allowing him to avoid paying out shareholders
HC said company acted as Mr S' agent, CA said
that the company acted as Mr S' trustee
HOL disagreed with both had either been found,
it would mean that Mr S' liability was not limited to
the amount of money that he put into the company
originally, thus he would effectively be held liable
for the companies everyday liabilities.
A Company is to limit the liability of it's
shareholders
The HOL said that the 'sham' argument could not
run, as it was common practice for companies to
have receptionists, and workers hold shares thus
many companies would be found to be
shams/aliases
Lord Shershol Just because a shareholder is a managing
director/in control of the company, does not
automatically make the company the agent of that
person
Creditors ought to know who the director/owner
of the company is

2.2 Corporate Personality Companies Act 1993

Separate Corporate Personality


blurred in practice e.g. bank want security, shareholder personally guarantees loan for the
company. Bank can enforce the guarantee against the shareholder if the company goes under.
The shareholder is contracting with the bank as a separate legal person they are free to
accept or decline to do so. But if that happens the shareholder will be on the hook is the
Company goes under.
A shareholder and company are free to contract with each other (Lee v Lee's Air Farming)
Lee v Lee's Air Farming

L was made sole director through the companies' article of association (in it's constitution),
while also being the major shareholder (all but one of the total sahres) of his farm for top
dressing L was killed in plane crash, and Mrs L claimd compensation under the Workers Compensation
Act 1992 - to successfully claim compensation she had to prove that Mr L was a worker of the
company per the Act.
Issue was L a company 'worker'?
CA No As director,

2.6 Lifting the Corporate Veil


Third Parties cannot touch SH's = corporate veil (protecting SH/Co members) Salomon
Can ignore/lift veil to pin the Co's liability on it's members/directors
CoLNZ ch 3
2.6.1 Judicially
2.6.1.1 Avoiding an existing obligation FRAUD/FACADE
CB(1)Gilford Motor Co Ltd v Horne [1933] 1 Ch 935 (CA) Fraud/facade YES
Restraint of Trade clause prevented an employee from managing a new company based on the co who had
employed him's system of pricing, management etc.; and from soliciting their clients. The Court ignored the
fact that his wife ran the co ie. IGNORED DIFF LEGAL PERSONS pierced veil
CB(1)Jones v Lipman [1962] 1 WLR 832 YES
sells to his own company over purchaser, J breaching agreement to J.
Held co 'device/sham' for L to avoid legal obligations
L's knowledge is imputed to the Company company being a separate legal person has notice of an
equitable interest via the knowledge which L had
What explanatory power have the terms that the judges used in the preceding two cases (cloak, sham, device)?
"Sham" does have a precise legal meaning: the situation where parties enter into a transaction using a
particular legal form, but intend that the transaction take effect other than in that form. An example is where
one party "sells" property to another, but both parties intend that the "sale" really take effect as a mortgage (so
that the "vendor" can "repurchase" the property upon payment of the sale price plus interest). In either of these
two cases was the company a sham in this sense?
(2)Chen v Butterfield (1996) 7 NZCLC 261,086 NO

where D agrees to lease to P, then uses premises themselves, the court held P could not sue D
Tipping J coporate veil shouldonly be lifted in certain contexts, nd circumstances where it's preseve would
create SUBSTANTIAL INJUSTICE
Important: separate legal personality is part of legitimate facet of commerce which provides certainty
CB(2) Official Assignee v 15 Insoll Avenue Ltd [2001] 2 NZLR 492 YES
(noted Watts [2001] CSLB 92)
bankrupt person incorporated company using names of ficitious persons.
issued shares to infant children. Subsequent transfers made without childrens knowledge, to other persons
without following appropriate legal procedures
Claim: D using Co to hide fund that should have been available to [creditor] OA
Held Co treated as same person as D = lifted corporate veil as the company structure was a sham, being
used to defeat creditors OA given access to land
[corporate veil is not really in existence when a company is a fake anyway it's technically a 'fake veil' thus it
has no ability at law to be present as it does when the company is a legitimate, and not a sham company]

2.6.1.2 Agency
CB(2)Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116
How can the finding of agency in this case be reconciled with Salomon?
Do you think that the facts upon which the agency relationship was found are unusual in parent/subsidiary
relationships?
(2)Re Polly Peck International Plc [1996] 2 All ER 433
CB(1)A-G v Equiticorp Industries Group Ltd [1996] 1 NZLR 528 (CA)
2.6.1.3 But the starting point is the importance of the doctrine of separate corporate personality
(2)DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852
CB(2)Woolfson v Strathclyde Regional Council 1978 SC (HL) 90
(2)Montevento Holdings Pty Ltd v Scaffidi [2012] HCA 48
To what extent does this case overrule Smith, Stone & Knight Ltd v Birmingham Corporation?
CB(1)Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 3 WLR 1.
CB(1)Re Securitibank Ltd (No 2) [1978] 2 NZLR 136 (CA) at 157-159 and 171
(2)Savill v Chase Holdings (Wellington) Ltd [1989] 1 NZLR 257 at 277282
(2)Adams v Cape Industries plc [1990] Ch 433 (CA) at 532544
(2)Hadoplane Pty Ltd v Edward Rushton Pty Ltd [1996] 1 Qd R 156 (CA)
(2)Repatriation Commission v Harrison (1997) 24 ACSR 711 (FCA)
(2)Body Corporate No 188273 v Leuschke Group Architects Ltd (2007) 8 NZCPR 914 at [37][39]
(2)OA v Sanctuary Propvest Ltd HC-Auckland, CIV 2009-404-852, 11/6/2009, Asher J
2.6.2 Under statute
CA93, s 25, and ss 271272
CB(2)HEB Contractors v Westbrook Development Ltd (2000) 8 NZCLC 262,256
(2)Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at [80]

2.7 Corporate Agents Personal liability


-

Only breaches to of duties owed to 3rd parties outside of corporate structure -

Directors Powers and Duties


A Company cannot act except through its members ( agents, employees etc.). However,
liability for agents actions is not attributable to the company, rather it is dealt with by the
common law, relevant to the actor themselves. The issue is that the common law is still
confused about this.
The test is by the civil wrong, it is completely separate from agency or company law
Limited liability does not protect shareholders from personal liability
o S 97(3) CA a shareholder is only protected in that capacity, if they act as an agent of the company they are
outside of that, and can face personal liability
2.7.1 Liability for general civil wrongs

Orthodoxy vs. Disattribution Heresy


Trevor Ivory Ltd v Anderson [1992] NZ Court of Appeal
FACTS: Trevor was the director of a one man company. The company gave advice how to remove weeds. T gave advice to the Andersons to
use Roundup to remove weeds on their orchard. He failed to tell them not to spray it on the raspberries. The raspberries died and they lost
their crop. A sued for breach of contract for failing to provide proper advice, and in tort for negligent misstatement. Sued both the company
and T personally. ISSUE: Company was liable in contract and negligence, but was T (director) liable in negligence?
HELD: Unanimously held that T was not personally liable. 3 different views:

McGechan J - ORTHODOX GROUND (use this decision!) looked at the elements of the tort of negligence. Had T assumed
responsibility and had A placed reasonable reliance on that statement? On the facts, T failed to assume personal responsibility.

Hardie Boys J NON-ORTHODOX - directing mind and will approach, using the attribution test of Leonards Carrying. As T
was acting as the company, he wasnt acting as himself and was not liable for his own actions. Known as disattribution
heresy. The assumption of responsibility test does not reflect a requirement of the law of tort, but rather company law.

Presumptive immunity of directors because they are identified as directing mind and will. While a subsequent CA decision,
Watson v Dolmark, distinguished Trevor Ivory on this basis: a case of personal dishonesty is distinguishable from the question
whether the owner of a one-man company comes under a duty of care
Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 (CA)

Managing director of company (and major shareholder) faced action for negligent misstatement by director of one man company
Company enter agreement with AGENT for paid consultancy
In consult, company provided advice on how to deal with cooch grass using their product
Agent advised to use their product, but not HOW to use it, or that it would kill his raspberry plants killed raspberry plants
He replanted boysenberries and sued Mr Ivory personally for negligent misstatement and breach of contract
Issue at trial: Was the advice negligent?
Held: Company was liable in negligence and contract, and director liable in negligence
Appealed by Director Issue Was the director personally liable for the negligent advice?
CA unanimous: upheld appeal - Mr Ivory, the director, could not be held personally liable for the advice he gave pursuant to the

companys contract or negligence


Issue 3 Possible grounds for the finding:

1) McGechan J Orthodox approach:

It must be shown that Mr Ivory PERSONALLY ASSUMED RESPONSIBILITY for that advice company

law is irrelevant to this question it is reliant solely upon the relevant tortious principles
Application: hard to show that one man company director was taking personal responsibility for advice the

faith of the plaintiff was in the man, not the company.


2) Hardie Boys J - directing mind and will approach -> DISATTRIBUTION HERESY

As directing mind and will of the company, the director was the embodiment of the company, thus his actions
are the companys and not his own

ISSUE WITH THIS APPROACH DISATTRIBUTION HERESY

This means the actors actions become DISATTRIBUTED to himself, and instead attributed to the

company
This means you must show that he was the acting mind and will of the company and had
ASSUMED responsibility for the agents actions

2.8 The Problem of Phoenix Companies


Phoenix company = arises out of the ashes of a former company
Issue whether directors can be liable for ceasing to trade when they should have kept going
Nothing in the Companies Act requires a business to continue trading, even if
successful, to continue trading

2.8.1 Common Law


Issue former creditors are left out in the cold as there is no duty at Common Law or in statute that PREVENTS a phoenix
co being created by the SH/directors of the former company, nor obliges them to continue working to pay off the debts of
the previous company.
There is also nothing preventing the resigned directors from enticing former employees to work for the
phoenix co
Even where a business is profitable, without any issue of financial difficulty,
shareholders have right to liquidate the co at any time

CB(1)Creasey v Breachwood Motors Ltd [1993] BCLC 480 (overruled in (2)Ord v Belhaven Pubs Ltd [1998] 2 BCLC
447 (CA))
Creasey is only one of several variants of the phoenix phenomenon. Often there are even more creditors who are left out in
the cold. Sometimes the shareholders/directors not only leave creditors without assets, but use the assets to pay debts owed
to themselves by the company. The shareholders/directors are not always as culpable as they were in Creasey
sometimes they simply find that their company goes into insolvent liquidation, and they then set up a second company
through which to continue their business.
Try to distinguish the different concerns that creditors may have in these variants. Do you think that lifting the corporate
veil is an appropriate way to respond to them?
CB(2)Lion Nathan Ltd v Lee (1997) 8 NZCLC 261,360
evidence fell short of providing a foundation from which it could be inferred that directors
had deliberately and knowingly set out to cheat or defraud LN in terms of s320(1)(c)
- not seeking to benefit themselves
- commercial reality that trust's loan had to be repaid in full for refinancing with ANZ
- LN wouldn't have received anything had the Co been liquidated, and the Directors actions did
nothing to worsen this reality
CB(1)Gray v Wilson (1998) 8 NZCLC 261,530
CB(2)Sojourner v Robb, Re Kut Price Yachts Ltd [2008] 1 NZLR 751 (CA)
(HC decision upheld on issue of sale at an undervalue of business to a phoenix company)

CB(2)Re Gellert Developments Ltd (2002) 9 NZCLC 262,942

Mr & Mrs G only SH and directors of GDL, shopfitting business


- Mr G governing directors;Mrs G resigned director, June 1992 cont managerial position
- Feb 1992 oral arrangment to share profits with Mr H, director of SCL ended July 1993
- Disputed amount owed by GDL to SCL SCL claimed in DC, determining a partnership between
GDL and SCL, in favour of SCL
- GDL ceased trading assets transferred to new company G's drawing acc debited with value of
assets but no consideration for goodwill
- GDL later liquidated, liquidator applied ofr an order of payments/contributions by G's under s301 Co
Act 1993
Liquidator claimed G's paid themselves excessive salaries, effectively removing profits and
assets from GDL, and causing an insufficiency of funds to meet debts owed to SCL
misapplication of property of the company and breach of fidcuiary duties of Dr and SH
reckless trading
negligence
breach s161 Act re authorisation of payments
Found excessive salaries, allocated all profits to salaries not acceptable for an insolvent co with
unpaid creditors
- no breach of directors duty re SH drawings, as no loss to Co as consequence
(Obiter problematic if amounts owing to Co by SH's re the current accounts are treated as assets of
the co, but prove difficult to recover on liquidation)
- Failed test what an ordinary prudent director could be expected to assess in all circumstances in
making a reasonable judgement as to the provision in the Co's accounts for liability to debtor (SCL)
- TRANSFER OF ASSETS TO NEW CO WAS NOT AT UNDERVALUE transfer not in breach of
director's duties to Co
- s161 subj to s107(1)(f)
- Breaches of directors duties re (I) reversal of acc payable re Harrison to act as a
reasonable and prudent director
- paying themselves salaries putting the solvency of the co at risk, prejudicial to interests of
SCL as creditor of the Co
- resolving to cease trasing ans transfer assets of co to a new co without making reasonable
provision for SCL as creditor of Co

(2)Campbell Creditors Actions in Respect of Insolvent Companies [1998] CSLB 143


See also section 9.3.4 of this outline

2.8.2 Phoenix Company Provisions


Phoenix Company provisions ss386A386F (as added by Companies Amendment Act 2006)
CB(2) Ricketts v Ad Valorem Factors Ltd [2003] EWCA Civ 1706; [2004] 1 BCLC 1
(2)Keeper, The New Order of the Phoenix (2008) 14 NZBLQ 21
2.9 Reflecting on Corporate Personality
A review of the issues