UNIVERSITY OF TECHNOLOGY, JAMAICA SCHOOL OF BUSINESS ADMINISTRATION COMPANY LAW - UNIT 1 NATURE OF REGISTERED COMPANIES A registered company is a business

organization incorporated by registration. In Jamaica, a registered company is incorporated under the Companies Act of Jamaica 2004. It is important to distinguish a registered company from unincorporated business organizations (such as sole proprietorship businesses, partnerships and quasi partnerships and statutory companies). Types of Registered Companies A registered company may either be a private or a public company. Private Companies The Companies Act provides that a private company must have a minimum one and maximum of twenty members. It should also have a minimum of one director and a company secretary. If a private company proposes to have one director, that director cannot also be the company secretary. A private company is not permitted under the law to advertise its shares and debentures to the public. It must not therefore issue prospectus or publicly solicit for purchase of its share or debentures. In practice, members and management of private companies are one and the same persons and these companies are usually small or medium size companies often owned by friends or members of the same family. Public Companies Under the Companies Act, a public company must have a minimum of two members and there is no maximum limit of membership, it must have no fewer than three (3) directors, at least two of whom are not employees of the company or any of its affiliates. Even though the law allows for the incorporation of public companies, usually in practice, it is private companies that convert to public companies in other to raise funds from the public. It is very unlikely that members of the public will purchase shares in companies that have not been tried and tested as viable private companies. Companies go public so that they can advertise and sell shares to members of the public. Usually this is done by issuing prospectus to the public. Public companies may choose to be listed on the Jamaican Stock Exchange if they are can and are willing to meet listing requirements of the Stock Exchange. Listed companies must publish their financial statements. Registered Companies may in addition to being private or public be unlimited, limited by guarantee or limited by shares. Unlimited Companies:-These are companies in which there is no limit to the liability of its members. This means that if the company goes into liquidation, the personal assets of its members may be used to pay creditors, such companies are not common.

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Companies limited by guarantee: - These are companies having the liability of their members limited by the articles of incorporation to such amount as the members may respectively have undertaken to contribute to the assets of the company in the event of it being wound up. These companies are usually nonprofit and so, they do not distribute dividends to members. Companies limited by guarantee are usually charitable, religious and professional organizations. Companies limited by shares- These are companies having the liability or their members called shareholders limited by the articles to any amount unpaid on shares held by them. The personal assets of the shareholders cannot be used to settle creditors of the company in the event of an insolvent liquidation. Nature registered companies/ corporate personality/veil of incorporation When a company is incorporated/ registered, it becomes a legal person in law and assumes a corporate personality. A registered company has a dual nature, as an association of its members but also as a person separate from its members. As soon as necessary formalities of incorporation are satisfied, a new entity comes into existence which is separate and distinct from its directors and shareholders. The company is recognized as an artificial person in law. A company has the capacity, rights, powers and privileges of an individual most respect .1 Most of the advantages of a registered company stem from its separate legal personality. The doctrine of legal personality, that is to say that a company albeit artificial is a legal person separate and distinct from its members was illustrated in the case of Salomon v. Salomon Co.,2 Salomon had for many years carried on a prosperous business as a leather merchant. He later decided to convert the business into a limited company and for this purpose Salomon & Co. was formed with Salomon, his wife and five of his children as members, and Salomon as Managing Director. He took all the shares of the company except six which was distributed to his family. Part of the payment for the transfer of the business was made in the form of debentures (a secured loan) issued by the company to Salomon. The Company ran into difficulties a year later, a receiver was appointed and the company went into liquidation. Its assets were sufficient to discharge the debentures but nothing was left for the unsecured creditors. The Court of Appeal held that the whole transaction was contrary to the intent of the Companies Act and that the company was a mere sham and was in reality and agent of Salomon, who was the real proprietor of the business. On further appeal, the House of Lords reversed the decision holding that the company was validly formed and that the business belonged to the company and not Mr. Salomon and that the company was in law a different person altogether from subscribers. The company is an artificial person entirely separate from those who have created it and as no fraud has been found to have been perpetuated on creditors, Mr. Salomon could be allowed to claim.

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Section 3 Companies Act [1897] A.C. 22, H.L.

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In Lee v. Lees Air Farming Ltd,3Lee who was a pilot, who conducted an aerial topdressing business, formed a company to conduct the business. Lee held 2999 shares of the 3000 shares in the company. The remaining one share was taken by his solicitor as nominee for Lee. Under the articles of association, Lee was the governing director with very wide powers. Workers compensation insurance was taken out, naming Lee as an employee. Lee was killed when his aero plane crashed while engaged in aerial topdressing. His widow made a claim for payment under the Workers Compensation Act 1922. Her claim was initially rejected on the ground that as Lee had full control of his company he could not be a worker within the meaning of the Act. The Privy Council held that the company was a separate legal entity distinct from its founder and Lee could enter into a contract of employment with the company. Characteristics of limited liability companies Limited liability A company being a separate person from its members is not liable for the personal debts of its members and vice versa. In the absence of express provision to the contrary the members will be completely free from any personal liability. Company debts are company liabilities. Where a company limited by shares or guarantee is unable to pay its creditors, the personal assets of members or directors cannot be used to settle outstanding companys debt because the liability of members is limited to any amount outstanding on the shares purchased or any amount they have undertaken to contribute to the company in the event of winding up. The members of an unlimited company however may be liable to pay outstanding company debts from personal assets. Property - On incorporation, the corporate property belongs to the company and not to the members. The members only own shares in the company (where the company is limited by shares) but do not have a proprietary interest in the property of the company. In Macaura v Northern Assurance Co. Ltd.4, Macaura owned land on which stood timber. He sold the land and timber to a company he formed and received as consideration all the fully paid shares. The company carried the business of felling and milling timber. A fire destroyed all the timber which had been felled. Macaura had earlier insured the timber against loss of by fire in his own name. He had not transferred the insurance policy to the company. When Macaura made a claim his insurers refused to pay arguing that he had no insurable interest in the timber. Only persons with a legal or equitable interest in property are regarded as having interest in it. The House of Lords held that the insurers were not liable. Only Macauras company, as owner of the timber, which had the requisite insurable interest in it. Only the company and not Macaura could inscure its property against loss or damage. Shareholders have no legal or equitable interest in their companys property. Commencing or defending legal actions - Since a company is a separate legal entity, it follows that it may enforce its rights by suing and conversely it may incur liabilities and be sued by others.

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[1961] A.C. 12 [1925] A.C. 619

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Perpetual Succession - A company does not die but continues to exist until its name is struck off or it is wound up under the provisions of the Companies Act. The winding up of a company includes a liquidation process. In Re Noel Tedman Holdings Pty Ltd5, the only two shareholders were killed on the same day and the court stated that the members of a company may come and go but this does not affect the legal existence of the company. Transferable shares In a company limited by shares, shares are personal property of the shareholders and may be transferred from one shareholder to the next. Whilst shares of public companies are transferrable without any restrictions, in private companies transfers may be subject to restrictions stated in the articles of incorporation. The veil of incorporation and its piercing/ lifting Ever since the House of Lords decision in Salomon v Salomon, the principle of corporate legal personality has been somewhat strictly adhered to by the courts. It is presumed that upon incorporation of a company whether public or private, an artificial veil is drawn to separate the incorporated company from its members. However, from time to time, legislature and the courts have lifted, parted or pierced the veil either to identify persons behind the veil or to hold the company one and the same with its members. The principle of identifying the persons behind the veil of incorporation or removing the veil to hold members one and the same as the company in specific circumstances for the purpose of liability is what is generally known as lifting the veil of incorporation. When the veil of incorporation is lifted outsiders, members or the company itself may benefit from such action.6 Companies Act provisions that allow for lifting the veil of incorporation: 1. Under Sec. 147 the director of a holding company is required to prepare consolidated accounts consolidating the financial position of the holding company and its subsidiaries. In this respect the Act does not treat each company in the group as a separate legal entity but recognizes the reality that a group of related companies function as a single entity. 2. Under Sec. 30 an officer of a company who signs or authorizes to be signed on the companys behalf any bill of exchange, cheque or promissory note where the companys name is not mentioned, not properly or legibly written thereon, will be personally liable for the amount if unpaid by the company. Under Sec. 44 & 45:- where a prospectus invites persons to subscribe for shares in or debentures of a company and such persons sustain loss or damage because of untrue statement (s) included therein, the following persons shall be liable to pay compensation; i. Every person who is a director of the company at the time of the issue of the prospectus

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[1967] QD R 561 Supra

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Every person who has authorized himself to be named and is named in the prospectus as a director. every person who has authorized the issue of the prospectus.

Lifting the veil at common law (case law): The courts have lifted the veil of incorporation in the following circumstances-. 1) Where the company was incorporated for fraudulent purpose or to evade its contractual liability the courts may lift the veil of incorporation. In Gilford Motors v. Horne7, Horne, and employee of Gilford Motors, had entered into an agreement not to compete with his former employer after ceasing employment. In order to try to avoid this restriction, Horne got his wife to form a company which undertook the soliciting. He purported simply to work for the company. The court was prepared to lift veil of incorporation to show that the company was a mere sham designed to allow Horne from evading his contractual obligations. Accordingly an injunction was granted to restrain Horne from breaking restraint of trade covenant. In Jones v. Lipman8, A vendor had agreed to sell his house but subsequently changed his mind. In an attempt to avoid selling the house to the plaintiff, he conveyed it to a company formed for the purpose. The court held that the defendant and his company should perform the contract with the plaintiff since the company was formed by the defendant for the sole purpose of evading his contractual obligations. 2) The courts have also lifted the veil of incorporation between associated companies in a group or companies having holding and subsidiary relationship. In D. H.N Ltd v. Tower Hamlets9, DHN was a holding company for a group of companies. One wholly owned company, Bronze investments Co., owned freehold property which was used by the other two companies in the group but, did not itself carry on any business. The land owned by Bronze Investments was compulsory purchased by the local authority that paid the market value. As the two companies using the land could not obtain suitable alternative premises, they were liquidated. DHN then tried to obtain distribution compensation for the other two companies in the group. The Court lifted the veil and examined the relations between the companies and held that it was best to consider all three companies to be a single undertaking which was effectively the holding company. In Adams v. Cape Industries plc10 the Court of Appeal refused to follow the decision in DHN. In that case, Adam and 204 others had received
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[1933] Ch. 935 CA [1962] W.L.R. 832 [1955] 1 W.L.R. 852 CA [1990] Ch. 433

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judgment in a Texan court for injuries caused by exposure to asbestos dust in a factory to which the defendant had supplied asbestos. The defendant had not contested the action because they had no assets in the U.S.A. However, the plaintiff sought to enforce the judgment in Britain against parent company (CI) and its wholly owned subsidiary Capso Ltd both incorporated in Britain. For an English court to enforce the foreign award of damages, it had to be established that at the time of the proceedings, CI had a presence in the USA. It was found out that CI did have at the relevant time a US Subsidiary as well as an independent marketing agent. The question was whether this constituted a presence? The Court of Appeal refused to lift the corporate veil so that the presence of the subsidiary could equal presence of the defendants. 3) The veil of incorporation has also been lifted to determine residence or enemy in time of war. Determination of residence is important mainly in connection with taxation and enemy status. The courts will look behind the company and its place of registration in order to determine its residence. In Daimler Co. v Continental Tyre and Rubber Co,11 A German Subsidiary company was treated as a branch of its holding company so as to give it enemy status and therefore taint with enemy ownership goods in transit from the holding company to the subsidiary. The United Kingdom Company was owned by five individuals and a company incorporated in Germany. Only one individual was British and he held just one share. The court held that the plaintiff need not discharge debt to defendant since effective control of the company was in enemy hands and to do so would be trade with the enemy. In Re F.G. Films Ltd12, English Company was formed to make a film which would obtain certain tax advantages by being called a British film. The staff and finance were American. It was held that the British Company was the American Companys agent and therefore does not qualify as a British film. ALTER EGO PRINCIPLE The company being an artificial person must of a necessity act through some natural persons. These natural persons may sometimes be considered agents or employees of the company. However, there are some individuals who are considered the directing minds and will of the company. These are the alter ego of the company. For these persons, their actions must be deemed actions of the company itself and not merely actions of agents or employees otherwise the company may never be held liable for its actions. Under the principles of agency, the company will be vicariously liable for the acts of its agents and employees once it is done within the scope of duty and once the agent is acting within express, implied, customary or apparent authority. However, in a situation where the
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[1916] A.C. 307 [1953] 1 W.L.R. 483

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particular individual or individuals have breached their warranty of authority, the company will not be liable, except the specific statute clearly provides for the liability of the company under the principles of strict liability or the individuals are considered alter ego of the company. The acts of the directing mind and will of the company are deemed acts of the company itself and therefore there is no need to find authority given by the company to these persons. The alter ego principle originated from the speech of Lord Haldane in Lennards Carrying Co v Asiatic Petroleum Co. Ltd. Lord Haldane said: . . . . a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person maybe the board of directors itself, or it maybe and in some companies it is so, that that person has an authority to coordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company. . . . For if Mr. Lennard was the directing mind of a company, then his action must, unless a corporation is not to be liable at all, have been an action which was the action of the company itself within the meaning of s 502. It has not been contended at the Bar, and it could not have been successfully contended that s. 502 is so worded as to exempt a corporation altogether which happens to be a corporation. It must be upon the true construction of that section in such a case as the present one that the fault or privity is the fault or privity of somebody who is not merely a servant or agent from whom the company is liable upon the footing respondent superior, but somebody of whom the company is liable because his action is the very action of the company itself. The essence of the later ego principle is to make the act of certain person(s) (usually the managing director) who may be considered the directing mind and will of the company, the act of the company for the purposes of liability, criminal or civil. Where the wrongful/negligent act is done by the alter ego or the directing mind of the company, the company is liable not on the basis of vicarious liability but on the basis of personal liability. Facts of Lennards case13 A company which owned a ship destroyed at sea was seeking to take advantage of limitation of liability under section 502 of the Merchant Shipping Act. The relevant section provided in effect that the company could escape liability if it could prove that the injury/loss caused was caused without the owners fault or privity. The loss resulted in this case from the default of Mr. Lennards the managing director of the company
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Supra

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that owned the ship and the company sought to take advantage of the section by contending that the loss was not caused by its fault. The court on appeal however held that since the loss was as a result of Mr. Lennards default, and since Mr. Lennards was the directing mind and will of the company, then the default of Mr. Lennards was the default of the company and the company could not therefore take advantage of the limitation clause to exclude itself from liability. Even though in the Lennards14 case it would appear that the only persons whose intention and actions can be imputed on the company is the companys managing director, subsequent cases have shown that the person whose fault is to be taken as personal to the corporation need not necessarily be a director. wherever the fault either occurs in a function or sphere of action which the owner has refrained to himself or is that of a manager independent of the owner to whom the owner had surrendered all irrelevant powers of control, it is actual fault of the owner within the meaning of the section.15 Thus in the Lady Gwendolyn16, the court imputed the fault of transport manager on the company on the basis that the transport manager was the companys alter ego under the relevant circumstances and in Moore v I. Bresler Ltd17, for the company to be found liable, otherwise it would be impossible to find the company liable in situations where intention or state of mind is necessary because as an artificial person, the company is incapable of having its own state to mind. The alter ego principle opened the way for company convictions for criminal offences. Cases in which the alter ego principle has been applied DPP v Kent and Sussex Contractors Ltd.18 The Company was charged with offences under the petrol rationing regulations involving making use of a false document with intent to deceive and making a statement which was known to be false in a material particular. At the trial, the justices held that the company could not in law be guilty of these offences since there was implicit in an act of will or state of mind which could not be imputed to a body corporate. On appeal, the court ruled that a company was capable of committing the offences in question and that it was sufficient for the purposes of the offence if the particular officer responsible, in this case the transport manager had the required intention or knowledge. In R v ICR Haulage19- A company was convicted with others for common law conspiracy to defraud and the conviction was upheld on appeal. In R v OLL Ltd20 - A company operating an activity centre was held criminally responsible for the deaths of four young people who were sent on a canoeing trip without proper
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Supra Win L.J. in the Lady Gwendolyn [1965] 2 All ER 283 at pg. 302 16 [1965] 2 All ER. 283 17 [1944] 2 All ER 515 18 [1944] 1 All ER 119 19 [1944] 1 All ER 691 20 [1994] Times, 9 December

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instructions or supervision. The state of mind of the managing director who was also convicted was attributed to the company. Limitations to the alter ego principle: 1. It is not the act or knowledge of every senior servant of the company which will be attributed to the company, but only acts of those persons who the company have made its responsible officers. Tesco Supermarkets Ltd v Nattrass21A shop manager, one of several hundred failed to ensure at his branch that goods advertised for sale at a particular price were in fact being offered for sale at that price. The question for determination was whether the company was 7liable under the Trade Description Act 1968. Held -that the shop manager could not be identified with the company (or as the company) and therefore the offence was not due to the act or default of the company within the context of the Act. 2. There are certain offenses for which a company cannot be liable because of the nature of the offense or the mandatory punishment of imprisonment or even death. Examples of such offenses are bigamy and murder.

If the act of a particular officer cannot be regarded as the act of the company, then the company can only be liable under the principle of agency or for the companys negligence in employing an incompetent person. In these cases liability maybe vicarious or statutory.

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[1972] AC 153

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TUTORIAL QUESTIONS SHORT ANSWER QUESTIONS 1. State two essential elements of a registered company. _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 2. What is corporate legal personality? _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 3. Briefly explain the problem that may arise if the Court of Appeal decision in Salomon v Salomon is upheld. _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 4. What do you consider the advantage of the courts decision in Lee v Lees Air Farming. _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 5. What is the difference between an unlimted company and a limited liability company? _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________

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_____________________________________________________________________ _____________________________________________________________________ 6. What is the difference between a company limited by shares and a company limited by guarantee ? _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ 7. What is the similarity between an unlimted company and a limited liability company? _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________

8. What is the difference between a company limited by shares and a company limited by guarantee? _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ MULTIPLE CHOICE QUESTIONS 1. Which one of the following propositions is NOT an advantage of incorporation? (a) A company has perpetual succession (b) Shareholders have limited liability for the debts of the company (c) Shareholders may have insurable interest in the company assets 2. Which of the following propositions is correct? (a) The veil of incorporation prevents the courts from recognizing groups of companies as one entity (b) The veil of incorporation will always be lifted by the court in order to recognize groups of companies

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(c) The courts will only lift the veil of incorporation to recognize groups of companies if legislation states that the group must be recognized 3. Which of the following statement is CORRECT under the 2004 Companies Act? (a) A private company must have at least 2 shareholders (b) A public company must have a minimum of 2 shareholders (c) All public companies must have a minimum of 7 shareholders CASE STUDY QUESTION A couple of years ago, James and his wife incorporated a company which was into manufacturing of healthy snacks and natural juices. The company was incorporated with 100 shares with James having 99 shares and his wife 1 share. James was also the sole director of the company and the one who prepared the snacks. His wife was in charge of the accounts and also prepared the juices. They were the only two employees in the company and they operated the business from a shop they rented on Molynes road. The company was doing well until James wife sold contaminated juice to a customer. The customer who suffered severe medical complications as a result of the contaminated food decided to bring legal action against James, his wife and his company. James on getting information on the imminent law suit closed down his healthy snacks and juices outlet and went underground in order to avoid personal liability. Advice all parties mentioned on all issues.

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